In a piece called Positioning for a Housing Recovery PIMCO says that the risks to housing have been overstated and while prices may continue to fall there are opportunities in the mispricing of that risk. They believe that the risk of the 11 million underwater home loans all becoming delinquent and going into foreclosure is much lower than most think. They also point out that the record low interest rates have created housing demand from large institutions (Like PIMCO, and individual investors too) searching for positive returns.
One of the opportunities they list is in apartment building investment, either through equity (owning) or debt (loaning). However they pass over multifamily in favor of REOs-to-rentals and distressed housing debt. It’s ironic that they would favor buying large numbers of single family homes to rent because the logistical nightmare of the scattered homes is what drives most real estate investors to apartments and other commercial real estate. The convenience of having 10, 20, even 200 units or more at one location on a single property on top of the economies of scale available make owning multifamily a much better investment.
While they do acknowledge the challenge of REOs-to-Rentals:
However, investors must be mindful of the operational complexity and illiquidity of a single-family rental portfolio. Managing a nationally diversified portfolio of rental properties presents unique challenges of surveillance and scaling, and procedures for maintenance and leasing must be designed to help protect earnings.
… Somehow that doesn’t lead them to picking multifamily investment. Are you a real estate investor who started out in single family properties and moved on to apartment buildings? We would love to hear your story-
Hat tip: The Big Picture blog
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.]
There are two other reasons that the CRE market and the CMBS tied to it didn’t crash: 0% interest rates, which means commercial borrowers weren’t punished with higher interest payments; and more importantly Continue reading The One Shoe That Didn’t Drop in The Financial Collapse- Commercial Mortgage-Backed Securities. #CRE
Distressed commercial real estate is slowly climbing down from the heights it reached in October 2010, of $191.5B. Forthcoming figures by Delta Associates and Real Capital Analytics will show that distressed commercial real estate in the US totaled $166.9B in January 2012, down $4.7B since October 2011… attributed to a mix of circumstances, starting with extend and pretend…
See the whole article here: Globe St.com: Distressed CRE Continues to Ebb