Cursed By Knowing The Numbers

Yowza.  From banks in the tank to property values falling off a table last fall.  We need to deleverage about $5T out of the economy, and real estate values are highly correlated with leverage.  The New Normal is about 40% equity and debt costs of ~6%.  Net Collected Rent and Net Operating Income on properties I am looking at have not started to deteriorate yet, but rising cap rates have given most assets about a 20% haircut on value.

Here is MIT's Center for Real Estate Transaction Based Index--although there are so few transactions you don't really know what the mark to market price is--and no transactions for the retail sector as an extreme example.  The results are showing a record price drop.

We are in the market right now buying apartments, so I am probing for a bottom every day--don't see one yet.  When will this end?  Repricing on compelled sales is happening now--question is getting commitment from our investors for what used to be good returns of low to mid teens on operations without construction and lease-up risk.

Not the type of curve that makes you want to jump back in the water, but demand may recover fairly quickly--unemployment is not THAT bad, no inflation, and the cost of debt is not unreasonable.

MIT's Supply and Demand index is another take on current market conditions--sell side is easily six months behind the buy side on pricing, and demand side pricing is off 30% from its high in 2Q07.  Demand spiked back up in early 07--don't believe we will see a repeat of that bounce.  Frankly, I don't know what is going to pick this market back up. 

Free Fallin'...

Sat in on a SF ULI Panel yesterday morning on gaining traction in the NorCal residential development sector.   This industry sector is still trying to sell into an ever dropping value market--absolutely the reverse of 2005.  Economics and sales tactics are now more akin to the used car business than the real estate business.  VELOCITY is the key principle.

Housing price declines appear to have stopped accelerating--stabilizing at a rate of decline of 20% per year.  The good news is that it looks like we are approaching a trough.  Bad news is that peak to trough is expected to be about ~40%.  Yowza.

Pulling the levers to achieve a 40% reduction in housing costs means that residual land value is negative.  Brother, can you spare some dirt?

Most interesting points made were about what is working today. 

The panelists had kicked the print advertising addiction--their two best friends were now signage and social networking.  They are starting to leverage the value of social networking--but at what price do your friends consider you smart when buying that condo?   And those broker open houses with the free trips to Hawaii?  Fuhgeddaboudit.

Is it time to start buying hard assets?