Tom Barrack over at Colony Capital put up a nice presentation of where he sees the opportunities for real estate investment in the current market. While Colony is geared to serving their large institutional investors, those of us operating on a smaller scale can benefit from Tom’s insights as well.
My Exec Sum of the opportunities he sees that I think will impact smaller investors in North America (and my comments in parentheses):
Commercial and residential real estate are great investments today because equities and debt are mispriced and the economy is regaining its feet. (There will be competition however).
Distressed debt in the US is diminishing but they are continuing to resolve non-performing assets (which can create deals for long term holders as these turned around assets come back to the market).
Single family residential for rent housing is stabilizing and becoming a institutional asset class (which can provide exits for those who have built portfolios of these properties).
Mezzanine debt and what he calls ‘stretched senior debt’ is becoming more available for value add & opportunistic deals because institutional investors such as pension funds need the extra yield (it will be easier to finance turnaround commercial properties at higher LTVs).
Mark Hickey of CoStar put out a piece looking at who was responsible for the near record $65.8B of apartment building investment in 2012. CoStar’s numbers show that private owners/developers did just about half of all acquisitions last year and institutions were in for 12%, both near their recent trends. REITs on the other hand increased their share by a third, responsible for 12% of sales volume last year.
Interestingly the sellers were pretty much the same groups, except REITs who were the largest net buyers last year.
Dividend Capital’s Q3 Market Cycle Monitor Report is out and naturally I looked at the apartment building investment cycle chart first. Specifically these days I’m looking to see where the author, Glenn R. Mueller Ph.D. has placed the Seattle market in the cycle.
Very nice piece from Joseph Y. Calhoun over at Alhambra Investment Partners covering some of the unexpected good things that could happen to our economy entitled Looking For Silver Linings. He includes this nugget with its implication of a good apartment building investment climate continuing:
In the ten years prior to the recession, household formation averaged 1.5 million per year. From 2007 to 2010 that rate was cut by 2/3. Household formation recovered to a bit over 1 million in 2011 and probably rose more this year. Still there is a gap of about 2.5 million households between the number formed in that period and what would be expected based on demographic trends. There is pent up demand for housing (although probably primarily rental housing) that only awaits some job growth to be realized. [Emphasis mine]
Tom Barrack of Colony Capital on what’s really happening in US real estate from an investor’s perspective. The clearest, most cogent look at the state of commercial, multifamily and single family markets today and where the opportunities are. The first five and a half minutes is about Europe and the bottom line there is don’t but after that it is all gold. If Tom wanted to be one of those real estate ‘gurus’ he could package this video with a big notebook and some advertising and sell it for $10,000- and it would be better than any of the other stuff out there. And you get it for free. I’ve watched three times and get an extra little nugget each time.
Where are Gen Y students most likely to find jobs? If you guessed New York or San Francisco, you’d be wrong. This year, small towns led the way as larger cities were more susceptible to economic downturns and only ranked outside of the college towns division on the index. As the report suggests, many small towns are essentially recession-proof since they house a consistent population of spenders.
See the whole MFE piece with the list and a link to cool map here.
There have been a number of reports recently claiming that renting is more expensive than buying a house. This is a great thing as everyone involved in selling, building and financing houses would tell you, especially if it were true. Unfortunately it is not for a variety of reasons, one of them being that owning the home you live in just isn’t that good of an investment, but we’ll get to that in a moment.
The first hurdle is the challenge of amassing the 20% down payment. On the average US home price of $242,300 the downpayment would be $48,460. That is essentially one whole year’s worth of the US median income of $51,413, so the question is how long would it take someone to save that much? This question is nearly always ignored in these comparisons. But say we all have a rich relative who leaves us the downpayment in their will, it’s all good after that right?
Some of these type of reports simply compare the average local rent to the mortgage payment for the area’s average home and therefore can be discounted out of hand. Others include taxes and insurance which is slightly better but they are still missing a very big piece of the cost of owning and operating a home; repairs and maintenance. Continue reading Rent Vs. Buy And The Great Myth of Homeownership as an ‘Investment’
Heidi N. Moore was talking with a investor who specializes in buying distressed commercial mortgage-backed securities (CMBS) and I was reminded of something Warren Buffett said back in 2007:
“When people start dropping shoes you really don’t know whether they’re a one-legged guy or a centipede.”
The investor was saying that the commercial real estate (CRE) market has been under the same pressure as the housing market but the CRE market hasn’t crashed. Why hasn’t that shoe dropped… and why won’t it?
The investor said that CRE was “rife with all the same corruption as the housing market: banks didn’t do their homework before signing loans, ratings agencies were overly generous in classifying weak loans as strong, but when it came [time] to mark down the value of the struggling commercial real-estate loans, many banks simply refused. They inflated the values of the loans to make their balance sheets look good.” [And therefore could keep all their bailout funds at work speculating in derivatives and jacking their bonuses instead of being set aside to cover losses.]
Good article in Asset Management Quarterly Value Add Has Its Day talking about how investors have split since the Financial Meltdown in 2007 into a risk adverse group favoring mostly Class A apartment building investments in core markets and a more risk tolerant group seeking high returns by purchasing distressed debt.
This has created an opportunity to generate good returns with investments in properties that need help of some kind. A few bullet points:
“It’s [The polarization] left this big open hole in the middle of the playing field for middle-risk, middle-return strategies, and it’s made the pricing on value add very attractive,”
“It should be an extremely desirable place to invest but you haven’t seen a lot of investors go there yet, which is why it’s such an interesting opportunity.”