Free-Fallin'
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.
