Given that I’ve already spelled out my thinking on the sector, I’ll use a “bullets” format here, pulling in ideas from recent reports by Goldman Sachs (GS) and Stifel Nicolaus, as well as information from a very well-placed broker in the Washington area:
1. In prime office markets, closings for trophy properties are being done at 7.5-8.5 cap rates; anything other than “trophy” quality is above 9.0 caps. Against a backdrop of halcyon-era deals, which happened at nominal 3-4 caps (in reality cap rates were at zero since under normalized financing terms there would have been no cash flows), and leveraged 75% plus, this means that many properties have now lost approximately 50% of their value.
To wit, Normandy’s $660 million foreclosure of Brodway’s Hancock Tower in Boston took place at 50% of the original price, but only because Normandy chose to assume the very favorable loan on the property. In a regular auction sale, the property might have pulled in less than $500 million (Stifel Nicolaus).
2. “CRE fundamentals will continue to worsen for the next 12-18 months; cap rates will rise another 3 to 5 points, to the low teens; secured financing costs will rise to the 8-10% range; unsecured financing will command double digit rates.” (Goldman Sachs).
I agree completely, and it matches the assumptions surrounding many troubled projects we’re familiar with……..
……..10. At the risk of being redundantly redundant, the ProShares Ultrashort Real Estate (SRS) remain an excellent trading vehicle to short CRE, and just as bad an investment tool to achieve that purpose. I continue to trade the former, but I’ve now started a short position in the IYR, looking for it to bleed slowly for an extended period of time.
Full Story: http://www.minyanville.com/articles/GS-SRS-IYR-goldman-Sachs-Boston/index/a/22256/p/1