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The Raub Report – Commercial Real Estate Newletter for San Antonio

by admin on June 30, 2011

2011

Investors are making the marketplace for commercial properties really interesting these days. Of course, you hear every day about the “crisis” in mortgages, with maybe 25% of owners having negative equity, with home values less than their mortgage. But actually less than 4% of mortgages are in default in the U.S. Most everyone pays even when they have negative equity. Some markets and sectors have come roaring back. For example, Class A apartments are bringing sales prices at nearly the values seen at the height of the market in 2006. Office buildings in the gateway cities of New York, Boston, Washington D.C. Chicago and San Francisco are priced back up to the top of the market.

This is an illustration of how the commercial real estate market has bifurcated, i.e. split into two segments. Capital went on “strike” starting in 2008. Not that Capital (debt and equity) is belligerently seeking better returns, like a Labor Union seeking higher wages for less work. Capital is bi-polar, tending to greed in good times and to fear when times are bad; Note: times have been bad for Capital since about 2007, so Capital has gone into hiding because the predator, Uncertainty, has been prowling about seeking whom it may devour.

In the Raub Report of July 2010 I wrote about Uncertainty as immeasurable Risk. Risk can be measured by interest rates, discount rates, insurance premiums, capitalization rates, etc. This forms the cage to contain it. Uncertainty is the animal of Risk that got out of its cage and threatens to eat our Capital. You do not want your Capital to get eaten so you keep it safely locked up in a no yield money market fund or under your mattress; either one is about the same. Capital is not going to be allowed out to work, grow and play again until Uncertainty gets put back into its cage and morphs back into measurable Risk. The D.C. Government is
trying to accomplish this re-caging. How’s that working out for you?

Back to the world of real estate investment: The top tier of investment properties is highly sought after because of the huge amounts of Capital on the sidelines trying to find better returns. Investors believe that top quality properties have much less Uncertainty attached to them, so they are safe for Capital to go to work there. With Money Market returns below 1% the added return of a top quality office building in New York at 5% seems like a good bargain with reasonable risk.

There are also enormous sums of money going after the bottom of the market, like foreclosed homes, and cheap commercial properties, the theory being that they can’t get any cheaper so the Uncertainty is low and risk is measurable. Funny thing though – there just isn’t much to be found. Banks are trying to retain bad loans as long as they can because the Federal regulators do not want properties dumped on the market causing an even more serious decline and endangering the solvency of even more banks. This game is called Extend and Pretend.

Indications are that commercial foreclosures will start to accelerate in the latter half of this year and this will actually be healthy for the market. Once this overhang of properties is off the books and the write downs are taken, then the investment mode will change from buy only gold plated properties or turn-arounds, to buying good properties at reasonable prices for solid appreciation. Your “take away” should be, I think: Commercial Properties are already just starting to be a strong asset class and will get stronger in the next several years.

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Stay cool, my friends,

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