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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
A little while ago, I posted a lesson on how Sam Zell was starting to liquidate his commercial real estate portfolio. Essentially he was calling the top. Just like he did once before, when he made almost $2 billion more than if he had waited a few months to sell.
I read an article in the Wall Street Journal recently that demonstrated just how smart Zell really is, and how he has an uncanny ability to read the market.
The piece in the Journal stated that sales of U.S. commercial real estate plummeted in February. And they speculated that it was a pretty clear signal that a 6-year bull market might be coming to an end.
How bad was February?
Well, only $25.1 billion worth of office buildings, stores, apartment complexes and other commercial property changed hands, compared with $47.3 billion a year ago and $46.2 billion in January.
That’s pretty close to a 50% decline.
They said that prices had been going up on pretty much a straight line since 2009, but that now they’re beginning to level off and even decline in some areas.
Also on analysts’ and REIers’ minds about February…
They also asked the burning question that everyone in real estate has – was February a temporary blip or the beginning of a more lasting pullback? And it’s easy to see why. One index, which tracks higher-quality property owned by real-estate investment trusts, is 24% above its 2007 peak and 102% higher than the trough it hit in 2009.
They quoted an analyst at Blackstone - the largest private equity real estate investor, and one of the biggest property buyers - as saying that in spite of the decline, the commercial-property market is much healthier than before the 2008 crash. He said that rents, occupancies and other fundamental factors are improving for most property types, while new supply growth has been limited.
The analyst’s opinion differed from Zell’s, and he said that in his opinion: “It’s too early to call the end of the cycle.”
But, while Blackstone, who’s not exactly bullish, is staying the course, others are following Zell’s lead and heading for the exit. One large commercial real estate trust, for example, has sold $765 million worth of property so far this year.
The Journal quoted the CEO of that trust as saying they’re “accelerating” their property sales, and that: “We’ve made the call that given where we are in the real-estate cycle, now is a good time for us to be harvesting value by selling.”
The source of the decline…
The interesting thing about what’s causing the decline is that the market has slowed primarily because of forces at work in the capital market rather than problems stemming from real estate itself. And that those forces have made debt—the lifeblood of real estate—more expensive and more difficult to obtain.
The most dramatic sign has been the sharp decline in bonds backed by commercial mortgages. In 2015, about $100 billion of commercial mortgage-backed securities were issued. This year, experts believe volume will fall to $60 billion-$75 billion.
The real-estate debt markets began to tighten at the end of last year as concerns grew about interest rates rising and new regulations on lenders (enacted in response to the world financial downturn) began to take effect.
In my mind, this is a good thing. I haven’t been able to touch an apartment building in my market in at least a couple of years due to the insane buying frenzy. Now that the frenzy is subsiding, prices should get more rational and even start falling.
I’m looking forward to it.
What’s your take?
Where do you think the markets are headed? And what are your thoughts about what February’s numbers really mean? Share below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.