Peter Pays Paul

CNBC has an interview with Barry Gosin from Newmark Knight Frank in Fear in Commercial Real Estate.

“The question really is how quickly will this adjust? When will rent come back, when will cap rates reduce and when will the fear be out of the market? Fear is a lot more of a powerful emotion than greed,” said Gosin. “You can control greed to a certain extent but you cannot control what you do under fear.”

Gosin also noted that banks have assets left on their balance sheets to refinance some of the loans, but the financial institutions are putting other concerns first.

“In addition to real estate, banks are concerned about consumer lending and they’re concerned about revolving credit,” he said. “With everything assaulting the banks, they are still hoarding cash and as a result they are not very easily going to roll over some of these loans.”

There is truth in Gosin’s statements. Investors are gripped  with fear.

Existing investors are frozen by the uncertain future for rents, vacancy, and interest rates. Many see the value of their property decreasing and they are uncertain of what to do.

Investors with capital are cautious and are only investing in projects that have very little downside.

Take for instance the Yellowstone Club in Montana. GlobeSt.com reports that the Yellowstone Club Trades for $115M.

The new owner is Boston-based CrossHarbor Capital Partners, a joint venture of Discovery Land Co. and members of the Yellowstone Club. Discovery Land Co., based in Scottsdale, AZ, developed the Kukio Resort, a private club on the Big Island of Hawaii in partnership with the Honolulu-based Kobayashi Group, according to published reports. CrossHarbor managing director Sam Byrne, who previously invested approximately $200 million in Yellowstone Club real estate, offered to buy the club last year for $470 million, according to reports.

Buying a property for 25% of what you offered last year is a pretty good deal.

CoStar reports that Macquarie Selling 75% Interest in 86 U.S. Centers for $1.3 Billion

CalPERS said that this portfolio is substantially comprised of the same shopping centers it sold to Macquarie in a 2005 portfolio transaction, under which Macquarie acquired a 75% interest in 100 centers from CalPERS/First Washington for an amount reflecting a total portfolio value of $2.74 billion.

The purchase is at a significant discount to what was paid in 2005 and reflects Macquarie’s desire to focus on Australia and New Zealand.

Unfortunately, government meddling only aggravates the uncertainty in the market. If the markets were left to correct on their own, investors could act based on historical trends. However, with Uncle Sam slapping the Invisible Hand of the market investors are unable to predict how long they will have to hold out.

Until the fear resides it is going to be a rough ride. Hold on to your hat.

Previously, I wrote about The Money on the Sidelines and the vulture funds waiting to strike.

It appears that a vulture fund in the U.K. has made their first purchase according to the Wall Street Journal article Vulture Fund Circles in U.K.

For nearly a year the veteran British property investment team of Raymond Mould and Patrick Vaughan has sat on their vulture fund, waiting for the right moment to pounce on the growing carnage in commercial real estate.

Now their venture, London & Stamford Property Ltd., is making its first move, buying the prime office building at One Fleet Place in the hard-hit City financial district of London for £74 million ($108.6 million). Given their track record for good market timing, the deal could be a watershed event indicating that the steep decline in British prime property is near its bottom.

Timing the Bottom of the Real Estate Market

Investing in a declining market has been compared to catching a falling knife, you want to catch it as close to the bottom as possible.

Most of the vulture funds have been circling, waiting to make sure that their prey was dead. In this case their prey is the commercial property investors that bought in the last few years with ridiculously low cap rates, high leverage, and inflated rents.

As the WSJ.com article points out this may be a risky move, or it may be a brilliant move depending on where prices go in the next few months. If prices continue to fall, the building may be worth even less in a matter of months.

However, if this is the bottom of the U.K. real estate market, their quickness to act may have allowed them to get a quality building at a great price and before others bid up the price.

Thus the analogy of the falling knife. If you act too soon, you may get cut. If you act to late, you have competition from other buyers and the value begins to go up.

Reaching the Bottom

This pattern is likely to be repeated here in the United States. A few brave vulture funds will decide that we have reached bottom and will make an acquisition or two.

One of two things will happen. If the value of these assets falls, the other vulture funds and investors will stay on the sidelines. If the value holds steady, expect to see a feeding frenzy as competition for assets heats up.

Photo: Circling Vultures by AndyRob

Is this part of an insidious plan to force the Middle East to kowtow to the U.S. by having them throw money after companies swirling around the drain?

Saudi Prince Alwaleed bin Talal plans to support Citigroup by upping his stake in the bank, but news of the modest increase may not be enough to revive weary investors' confidence.

Royal Treatment Can’t Save Citi – Forbes.com.

The Wall Street Journal is reporting on the plight of Vallejo, CA today. The Journal reports that Vallejo is already down 20% of its police force since January and could loose another 20% of its force by the years end.

California Cities Cut Police Budgets – WSJ.com.

This is just one of the effects that cities are experiencing due to lost revenue from development fees and property tax revenues. City councils bought into the myth that real estate would continue to go up in value indefinitely and city services would be adequately funded.

An underfunded police force will likely affect real estate values in Vallejo and other municipalities like Vallejo. If crime rises and the perception of safety decreases, real estate values in some areas of Vallejo will likely decrease as neighborhoods become less desirable.

This could be an unending downward spiral for cities as property taxes are assessed on transfer value in California due to Proposition 13. Lower real estate values would generate lower property tax revenue and the city would have to cut more costs from their budget.

This is a key reminder to real estate investors that local government issues can affect long-term real estate values.

Deals in cities with bankrupt or poorly funded city coffers should be given a higher degree of scrutiny and underwriting.