Wednesday, 19 May 2010 11:03

Commercial Real Estate is Pretty Much Doing What We Expected It To Do, Returning to Reality

Moody's has released data that shows CRE has fallen for a second straight month. Thus far, things are rolling along exactly as we anticipated in our  CRE 2010 Overview (2.85 MB 2009-12-16 07:52:36), available for free download.

moody's real estate research

moody's real estate research1

You can view the full report here: Moody’s/REAL Commercial Property Price Indices, May 2010.

For those into CRE, outside of our consulting abilities ( CRE Consulting Capabilities (655.48 kB 2009-12-17 14:17:01), subscribers can access a bevy of  CRE related forensic valuation reports on individual REITs and developers, the macro scene and the performance of prominent industry investors through our download service.

Non-subscribers should click here for recent content in the commercial real estate space. You'll notice a lot of funny stuff going on in CRE if you just look past that pretty glossy cover in the front of the annual report (feel free to click the links if you want to dig in deeper)...

Reference the truth: CRE 2010 Overview (2.85 MB 2009-12-16 07:52:36),

  1. rents are dropping rapidly;
  2. CRE values are collapsing;
  3. CAP rates are exploding;
  4. the refinancing market is looking for much lower LTVs while the property values of recently purchased properties are dropping simultaneously,
  5. and an often overlooked occurrence – REITs are selling off the more valuable assets to fund the gaps necessary to rollover overpriced debt, further reducing rent rolls and dramatically reducing the overall value of the existing portfolios.

These five ingredients combine to make a deadly elixir. Click any of the charts below to enlarge…

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The truth as applied to certain REITS

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the truth as applied to REIT holdings...

The results of these activities have been congealed in our analysis of Macerich’s entire portfolio of properties (118+ properties), including wholly owned, joint ventures, new developments, unconsolidated and off balance sheet properties. Below is an excerpt of the full analysis that I am including in the updated Macerich forensic analysis. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).

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Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV’s above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates.


and the Truth as Wall Street Sees it...

Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!

A hypothetical example easily illustrates how the financial structure of a typical real estate fund is so tilted to the advantage of the fund sponsor as to be analogous to a cost-free “Call Option” on the real estate market.

The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders – lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here: Real estate fund illustration. All are invited to run your own scenario analysis using your individual circumstances and metrics.


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Anybody who is wondering who these investors are who are getting shafted should look no further than grandma and her pension fund or your local endowment funds…

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Last modified on Wednesday, 19 May 2010 11:21