Relativity
by Tony Michelman
Down by the beach, an unfortunate, senseless crime was committed:
A snail got mugged by two turtles.
After the incident, police detectives questioned the snail about what happened.
“I don’t know what happened,” sighed the shaken snail. “It all happened so fast!”
Relatively speaking, changes are occurring at breakneck speed in the financing of
commercial real estate. After years of free-flowing capital, the collapse of the subprime lending sector has caused dramatic cutbacks in liquidity.
Consequently, it’s suddenly a very different marketplace from a pricing standpoint.
The Commercial Mortgage Backed Securities market (CMBS) – where mega loan packages that drive much of commercial lending emanate – is in an unprecedented period of volatility. There’s a lot of unsold inventory. Even worse, the erratic behavior of finance rating agencies in the subprime debacle has made risk calibration a shaky endeavor.
It’s pretty hard to price financial products when confidence has been lost as to what value really is.
Is this a total catastrophe? A momentary setback? An opportunity?
Well, we enjoy Chinese food. Or, as the Chinese call it – food. Catch our drift? It all depends on where you happen to be
sitting. What your capabilities and priorities are.
How you see the real estate world on both a macro and micro basis.
Or maybe where you live.
The subprime virus has spread across the country taking down the most vulnerable communities. For instance, there are a lot of new retail centers in the Midwest that already had high vacancy factors. It’s very difficult to reposition assets like that during a credit crunch.
In California, some cities which saw property values increase at meteoric rates are plummeting like a cold comet. Land sales in Modesto and Bakersfield are half or less of what they were a year ago.
Los Angeles is another story.
There is a dearth of vacant land available here. There hasn’t been all that much new construction over the last decade. There isn’t an oversupply of commercial product. There’s a shortage.
Despite the national carnage, all the local underlying fundamentals are still relatively intact. Nonetheless, prices in Los Angeles could easily fall by 15% or more over the coming year.
Not so bad…Relatively speaking.
In deep prayer, a man suddenly looks up to the heavens. “God,” he says, “I would like to ask you a question.”
To the man’s shocked surprise, God answers: “No problem. Shoot.”
“Uh, is it true, God, that a million years to you is but a second?”
“Yes, that is true.”
“Well, then, what is a million dollars to you?”
“A million dollars to me is but a penny.”
“Ah, then, God … May I have a penny?”
“Sure,” says God, “Just a second.”
In life, timing is everything. If you bought Microsoft at stock inception, you’d be rich. If you crossed the street ten seconds earlier, you might have gotten hit by a bus.
Historically, those who do best in real estate investing are those who adeptly time cycles. Buying low and selling high. Leveraging money through financing and often returning profits unachievable in
traditional, certificate-driven markets.
In the global economy, things had supposedly changed. With commercial real estate products available worldwide, with REITS, with greater transparency, with more education throughout the industry’s workforce. The risk, many thought, had been mitigated.
So what happened? Buoyed by these new perceptions investors started taking even greater risks is what happened!
And though commercial is an entirely different animal than residential real estate, the
companies that finance both are similar. The residential
subprime meltdown traveled to the commercial sector via a commonality in lending practices.
At the end of the day, real estate markets will always be comparatively inefficient to Wall Street and most stock markets around the world. Real estate is an entrepreneurial proposition. The economics of land and building development are more project and locale specific.
There is no definitive formula, no definitive truth. In real estate, all truth is relative.
Absolutely.