{"id":2541,"date":"2010-06-09T09:05:07","date_gmt":"2010-06-09T13:05:07","guid":{"rendered":"http:\/\/www.technologyinvestor.com\/?p=2541"},"modified":"2010-06-09T09:24:54","modified_gmt":"2010-06-09T13:24:54","slug":"a-little-good-news-among-a-tsunami-of-misery","status":"publish","type":"post","link":"https:\/\/www.technologyinvestor.com\/?p=2541","title":{"rendered":"A little good news among a tsunami of misery"},"content":{"rendered":"

We just sold a building in Sacramento for a good price. It returned an IRR of 16.49%<\/strong> over our seven-year ownership. I got a real live check yesterday. Cash ranks right up there with money, happiness and a good backhand.<\/p>\n

The New York Times isn’t optimistic often. It ran a piece yesterday that included:<\/p>\n

It\u2019s Just a Few Deals, but the Office Market Is Stirring
\n<\/strong>In January 2007, not long before the market for commercial buildings peaked, Scott Rechler, the scion of a Long Island real estate family, sold the Reckson Associates Realty Corporation to S. L. Green Realty, Manhattan\u2019s largest office landlord. The $4 billion deal included five Midtown office buildings.<\/p>\n

Now, as the Manhattan office market is showing signs of life after a long hiatus, Mr. Rechler has been one of the first to jump back in. His private company, RXR Realty, has agreed to pay $279.3 million for a 49 percent interest in 340 Madison Avenue, at 43rd Street. That price values the building at $570 million, or $687 a square foot. The transaction is expected to close on Wednesday.<\/p>\n

It will be one of only five transactions so far this year for office buildings of over 100,000 square feet. But an additional seven such deals are in contract, according to the research firm Real Capital Analytics. Only nine sales like that were completed during all of last year, compared with 101 in 2007.<\/p>\n

Though the number of transactions remains small \u2014 and several are acquisitions of loans or partial interests, as in the case of 340 Madison \u2014 real estate specialists say they are encouraged by the accelerating pace and the robust prices. \u201cWe\u2019re not seeing $1,200-a-foot trades, but some buildings are trading not too far off from where prices were before the market went crazy in 2006 and 2007,\u201d said Robert M. White Jr., the president of Real Capital Analytics.<\/p>\n

When investors feel confident about future rent growth, they are willing to pay higher prices and thus accept a lower initial return. Several real estate specialists said the recent drop in capitalization rates, or first-year yield \u2014 the yardstick by which the real estate industry measures the health of a market \u2014 had been surprisingly rapid. When S. L. Green bought Reckson, the capitalization rate, or cap rate, was 3 to 4 percent, Mr. Rechler said. When investors began buying again last fall, the cap rate had climbed to 7 to 8 percent. Now, rates are generally 5 to 6 percent. The decline in cap rates means an increase in value of 35 to 50 percent, said Michael Knott, an analyst for Green Street Advisors, a research company in Newport Beach, Calif. \u201cIt has been a stunning reversal,\u201d he said.<\/p>\n

The prices indicate that buyers are making a bet that rents will increase and that the market will continue to recover, Mr. Knott said. \u201cThere\u2019s not a lot of margin for error,\u201d he said.<\/p>\n

Though a lot of capital has been raised for investment in commercial real estate, few properties have been put on the market. As a result, it is difficult to be certain where values stand. \u201cWhat you\u2019ve seen is a scarcity premium,\u201d said Scott A. Singer, the executive vice president of the Singer & Bassuk Organization, a New York company that arranges financing for transactions.<\/p>\n

But Mr. Singer said the thinking among investors and lenders had altered radically. \u201cThere\u2019s been a tremendous change in the last 30 to 45 days, in terms of aggressiveness and the desire to consummate transactions,\u201d he said.<\/p>\n

Financing is once again available, but lenders are no longer underwriting loans based on projections of significant future rent growth or lease-up, as they did in the last cycle, and buyers must put up at least 20 percent of the equity, said Marcus Giancaterino, the global head of commercial real estate finance at Citigroup. \u201cThe bottom line is that there is a functioning debt market,\u201d he said. He said the Greek debt crisis had made people more cautious, \u201cbut nobody has stopped doing business.\u201d<\/p>\n

Because public companies tend to use less leverage than many private investors, it is perhaps not surprising that they have been the most active recent buyers. Scott Latham, an executive managing director of Jones Lang LaSalle, said real estate investment trusts, or REITs, like S. L. Green, accounted for 18 percent of the commercial real estate acquisitions in 2007, but only 10 percent last year. Their buying share has increased to 26 percent this year, Mr. Latham said.<\/p>\n

In recent months, S. L. Green has agreed to pay $330 million, or $547 a square foot, for 125 Park Avenue, a 26-story tower between 41st and 42nd Streets; and $193 million, or $636 a square foot, for 600 Lexington Avenue, a 36-story building at 52nd Street. The company is selling minority stakes in 600 Lexington and the McGraw-Hill headquarters building at 1221 Avenue of the Americas (between 48th and 49th Streets), to the Canada Pension Plan Investment Board. S. L. Green stopped buying in December 2007, but the company has completed transactions worth more than $900 million in the last six months, including debt and equity acquisitions, said Marc Holliday, the chief executive.<\/p>\n

Public companies have an advantage today because private equity buyers who drove up prices in the last cycle using high leverage have been pushed aside, Mr. Holliday said. \u201cThat opened the path to public companies,\u201d he said.<\/p>\n

The three buildings in the S. L. Green transactions last changed hands well before the commercial real estate frenzy. Many buildings that traded from the end of 2005 through 2007 have run into serious trouble because they do not generate enough cash to cover the mortgage payments and other costs. Analysts expected a flood of distress sales, but these have not materialized, even though the number of troubled properties keeps growing. Real Capital Analytics\u2019 list includes 49 office buildings in Manhattan, with a total value of $6.3 billion, said Ben Carlos Thypin, a senior market analyst.<\/p>\n

Among the most recent additions to the list is 1095 Avenue of the Americas, the newly renovated Verizon Building opposite Bryant Park at 42nd Street, which the Blackstone Group acquired in February 2007 as part of its highly leveraged $39 billion purchase of Equity Office Properties. But the building\u2019s loan is the largest in a pool of commercial mortgages, known as a commercial mortgage-backed security, that has been transferred to a so-called special servicer because it is on the verge of default, according to Fitch Ratings. The building is only 82.6 percent occupied, and leases for 40.4 percent of the space are set to expire by May 2012, Fitch said.<\/p>\n

Relatively few of these troubled buildings have been offered for sale because lenders have been willing to extend the loans in the hope of future rent increases.<\/p>\n

But if interest rates rise significantly, as many have predicted, more buildings will be under water and there is likely to be more pressure to sell, said Richard Baxter, another executive managing director of Jones Lang LaSalle.<\/p>\n

The 340 Madison Avenue building in which RXR is acquiring a 49 percent interest has a $400 million mortgage, which must be repaid at the end of 2011. Broadway Partners, a company that once snapped up office towers in Manhattan and elsewhere at a frenetic pace, bought the 22-story building from Harry Macklowe for $550 million in November 2006, when it was more than half vacant. Broadway Partners, which has a much diminished portfolio, sank $50 million into 340 Madison and increased its occupancy to 92 percent, Mr. Rechler said. RXR plans to manage the building, where the average annual rent is around $60 a square foot.<\/p>\n

Mr. Rechler, who planned to refinance the mortgage, said he had been looking for opportunities in Manhattan for more than a year. New development of office buildings has been limited, and companies are beginning to grow \u2014 factors that normally send Manhattan rents soaring. \u201cWe don\u2019t know if it\u2019s a year away,\u201d he said, \u201cbut some time it\u2019s likely to happen.\u201d<\/p>\n

Everyone else is pretty depressed by:<\/strong><\/span><\/p>\n

1. The unstoppable BP Gulf Leak.<\/strong> Now there’s news of another leak. Click here.<\/strong><\/a><\/p>\n

2. Foreign debt dragging down Hungary, Spain, the Euro, etc.<\/strong> Writes Bloomberg today:<\/p>\n

Global investors have little confidence in Europe\u2019s efforts to contain its debt crisis or in European Central Bank President Jean-Claude Trichet, with 73 percent calling a default by Greece likely.<\/p>\n

Only 23 percent say they expect the region\u2019s almost $1 trillion rescue package to both keep the European monetary union together and prevent a debt default by a government, according to a quarterly poll of investors and analysts who are Bloomberg subscribers. More than 40 percent say Greece is likely to abandon the euro.<\/p>\n

\u201cThere is clearly a risk of a breakup of the euro,\u201d says Geoff Marson, managing director at a Guernsey subsidiary of London-based Odey Asset Management, which oversees about $6 billion.<\/p>\n

Read more of this depressing stuff. Click here.<\/strong><\/a><\/p>\n

3. The latest lousy May employment numbers,<\/strong> in which the government had hired 95% of the people to do the 2010 census. The U.S. constitution mandates that we do a census every year. That means we hire temporary workers. There’s nothing in the constitution about how long a census is to take. Perhaps it should take 10 years? Then we could hire the workers permanently. What a brilliant solution, Harry. They should put you in charge.<\/p>\n

One of my money managers, <\/strong><\/span>who is, thankfully, net short, writes:<\/p>\n

I agree with Richard Russell generally. Based on recent market action, odds are a top has been put in. Note that I say ‘Odds are’. When someone pounds the table as aggressively as Russell, it rarely plays out the way it’s forecast.
\nThe key for bears will be to maintain such a primary view during market rallies.<\/p>\n

Ultimately, I do believe we could be setting up for a U.S. debt downgrade — the next Black Swan?\u00a0 Here’s why:<\/p>\n

Recently, Hungary has been in the news over its debt woes. Yet, according to The Economist, Hungary’s per capita debt is only 1\/3rd that of the United States ($10,000 vs. nearly $30,000). Currently, U.S. debt is at about 55% of 2010 GDP. In 2011, it is expected to rise to over 60%. It’s all right here in the Economist. <\/strong><\/a><\/p>\n

The media starts with Greece, then Portugal, Spain, and now Hungary. I think someone is controlling the news flow very carefully. Worse, I have yet to hear anyone offer a solution to our debt problem. So I wonder how the debt can even be repaid.
\nAnd if we can’t repay our debt, then what does that say for our equity markets? Not good.<\/p>\n

Harry, perhaps you would consider opening a forum on your site, asking for ideas on how the U.S. could repay its debt. The only solution I know of is massive printing of money, which would cheapen the dollar beyond most people’s comprehension (mine included).<\/p>\n

I believe we’re well beyond austerity as a solution. The notion of higher taxes, while it could help, seems impossible to implement politically.<\/p>\n

Whatcha<\/strong> doing with cash? <\/strong>I asked my favorite Texas dentist, who’s savy about his investments.\u00a0 His answer:<\/span><\/span><\/p>\n

Great Question Harry….for nearly a year now I have been doing YOUR highly appreciated recommendation of “Mattress Cash”…..<\/p>\n

\"\"<\/a><\/p>\n

Harry I don’t trust anything with the Markets…..I just work, save as much as I can and have not put any more money at risk…..the “Mental Comfort” of me knowing alot of my cash is “not at risk” is plenty for me…..I have no faith in the markets, I have no faith in our governmental policies and trust me the consumers I see are “holding back”…..the TV stock market pundits are not convincing anyone these days that our economy is on the “upswing”.<\/p>\n

I know you don’t own Microsoft. <\/span><\/strong>But please don’t. This stock is due for a large fall. More about why tomorrow.<\/span><\/span><\/p>\n

\"\"<\/a><\/strong><\/div>\n

Harry Newton, who is focusing on his day job, his family, his tennis and his charities. There’s no satisfaction in gambling in today’s stockmarkets. He’s still researching covered calls, straddles, naked options and all the other wonderful words here.
\n<\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

We just sold a building in Sacramento for a good price. It returned an IRR of 16.49% over our seven-year ownership. I got a real live check yesterday. Cash ranks right up there with money, happiness and a good backhand. The New York Times isn’t optimistic often. It ran a piece yesterday that included: It\u2019s […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-2541","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts\/2541","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2541"}],"version-history":[{"count":0,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=\/wp\/v2\/posts\/2541\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2541"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2541"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.technologyinvestor.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2541"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}