Commercial Real Estate: Is The ‘Smart Money’ A Buyer Or A Seller?

Summary: At the racetrack the ‘smart money’ will typically show itself just before post-time which allows the astute punter an opportunity to get onboard with the bet. Even then there are of course no guarantees. In real estate, very often the average investor won’t know what the smart money is doing until after-the-fact when it is already too late.

‘Commercial Real Estate: Is The ‘Smart Money’ A Buyer Or A Seller?‘

Wednesday, after nine years at 0%, the Janet Yellen-led Federal Reserve raised the fed funds rate to .25%!

They did this despite the fact that economic growth is tepid at best, inflation remains below its target rate of 2%, there’s turmoil in the junk bond market, crude oil is signaling a slowdown, other commodities are in bear market territory and more.

According to market pundits this is the first time that the Fed has ever raised rates into a potential recession.

Whether this tightening move was correct or incorrect will only be determined by time. That said…

Is The ‘Smart Money’ In Commercial Real Estate A Buyer Or A Seller Of Property?

Smart Money: Cash invested (or divested MH) or wagered by those considered to be experienced, well-informed, “in-the-know” or all three. Although there is little empirical evidence to support the notion that smart-money investments (or divestments MH) perform any better than non-smart-money investments do, many speculation methods take such influxes (outflows MH) of cash very seriously. (Source)

From an article at WolfStreet.com, these are the thoughts of Sam Zell, ‘legendary real-estate bottom-and-top picker and chairman of apartment mega-landlord Equity Residential‘.

The cautionary thoughts presented by a veteran of the commercial real estate market are, at the very least, worth listening to and considering…

‘Legendary real-estate bottom-and-top picker Sam Zell, chairman of apartment mega-landlord Equity Residential, got on Bloomberg TV and said, “There is a high probability that we are looking at a recession in the next 12 months.”

This is not even a remote possibility in the Fed’s miserably slow-growth forecasts it issued yesterday. But Zell was once again having a will of his own. He offered a laundry list of reasons: Multinationals are announcing mass-layoffs; global trade is deteriorating; China’s economy might be spiraling down; and “the strong dollar” is hitting US production.

But he said this only after he’d unloaded a ton of commercial real estate: in total 23,262 apartments in five states. The deal was announced at the end of October. Another 4,728 apartments are to be dumped next year.

As his firm pocketed the $5.4 billion it got from Starwood Capital Group for these units, Zell said: With “pricing currently available in the commercial real estate market, it is very hard not to be a seller.”

And prices for office, retail, and apartment buildings are in the most phenomenal bubble ever: up 10% this year through November, according to the Green Street Commercial Property Price Index, after having already jumped 10% in 2014. They’re up 100% from May 2009. They’re up 23% from September 2007, the peak of the insane bubble that blew up. Even on an inflation-adjusted basis, prices are now 12% higher than they’d been during that propitious peak of the bubble (see chart above).

So Zell dumped about a quarter of Equity Residential’s portfolio and will unload more next year. Most of these units are low-rise and mid-rise buildings, just when a dizzying construction boom is beginning to throw a lot of new supply on the market.

The unnerving thing is that Zell has a history: in 2007, when the commercial property bubble was already teetering, he dumped Equity Office Properties Trust into Blackstone’s lap for $23 billion, not including $16 billion in debt. Then all heck broke lose, prices crashed – see above chart – and commercial property defaults ricocheted around the country. And after the Financial Crisis, he went on a shopping binge…’ (Read the rest of the article here)

Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at mhaltman@hallmarkabstractllc.com.