A recent article has stated that billionaire Wilbur L. Ross said that US is in the beginning of a huge crash in commercial real estate. â€œAll the components of real estate value are going in the wrong direction simultaneously.â€ Wilbur Ross is one of the nine money managers participating in a government program to remove toxic assets from bank balance sheets.
The question here is does Ross have an ulterior motive in making such strong statements? Ross says occupancy rates and rent rates are both going down while on the other hand capitalization rates (the return which an investor demands in order to invest in the property) are going up. I agree with this.
Realcapital Analytics predicted that US commercial property real estate sales are forecasted to fall to the lowest level in almost two decades. Costar has stated that property values have gone down to 2004 levels. Moodyâ€™s realty commercial property price index has fallen 41% since October 2007. George Soros spoke at an organized lecture at the Central University in Budapest saying that bloodletting may be coming for leveraged buyout in commercial real estate.
The question that arises is does that mean real estate is a good asset to have? Even as the economy goes down people will still need a place to live. It is after all a hard asset like gold. Therefore is it a suitable investment haven during inflationary times? The corollary of this is that if commercial realty is falling then residential realty seems to be the sector that is offering the current opportunities.
Ross has said that he would use extreme caution before putting money into commercial real estate, especially office space as properties are currently losing tenants. I agree and I myself am not putting money in commercial real estate but am investing in residential & residential income properties/apartments, which is where the first opportunities seem to be.
During the 3rd quarter of 2009 office vacancy rates have reached a near 5 year high of 7017% while I have heard in San Diego some markets occupancy rates are closer to 35-40%. According to REIS shopping center vacancies are at the highest levels since 1992.
As of October 15th 2009 Ross spent less than $100 million of the $1.5 billion available to him under public private partnerships. This shows that he is not ready to go and buy. So what is he doing with available funds right now? He uses them to purchase securities which are backed by residential properties. He seems to be buying notes with underlying assets at a discount. That is what a lot of people with funds available are currently doing.
Ross was amongst a group of firms that agreed in early Oct 2009 to buy Corus Bank shares. Corus was going down in business so they will probably foreclose on asses they bought at discounts. As the assets deteriorate in value they will make money on what they are owed. Corus got into bad shape when the condo conversions went downhill. In 2007 Ross ventures into declining residential property market and he won an auction for a home loan servicing unit, American Mortgage Investments. He paid between $450-500 million for the right to collect payment and obtain escrow on $45.3 billion of home mortgage. Therefore for 1% he was able to control and collect services on that amount money.
Ross has rightly been dubbed as the king of bankruptcy by clients. Ross entered the US home mortgage as an increasing number of borrowers quit making payments and profits sank for the banks. Ross had moved into residential properties a couple of years ago and it seems he will be moving into commercial within the next few years.
Ross has an interesting way of deciding when to enter a market. He makes a big exhaustive list of all the things that are wrong with the industry today. Things he does not like about the industry. Then he makes another list of all what he would do to improve the industry if he could control those factors. As the second list develops to negate the first one, he decides it is time to enter the market under consideration.
The summary of the whole situation is that while the commercial realty sector may get bad, there are still certain opportunities available in the next 5-6 quarters for the prudent yet proactive investor.
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