When the vultures start flocking, is that a good sign for the economy? It may seem perverse but there’s probably some truth there. That’s why I take a little bit of hope out of this article in The Deal:
When it comes to investing, especially in real estate, the conventional wisdom is the best time to get in is at the bottom. And with interest-only financing coming due in the next few years and an oversupply of commercial office buildings, now seems to be that nadir or close to it. That’s why office landlord Vornado Realty Trust is looking to raise $1 billion in private equity funds, The Wall Street Journal reports to invest in distressed properties that will likely hit the auction block in the next few years.
The article points out that Vornado is not alone. PE real estate firms have announced $253 billion of fund raising plans for 2009 with $92.5 billion targeted for distressed real estate. These guys naturally smell bargains but they probably also give an early signal about the commercial real estate market.
Recall the S&L collapse and the commercial real estate collapse that was part and parcel of the debacle. Most people tend to focus on the, say, 1991 to 1993 time frame when the RTC began to dispose of their assets. That becomes the time frame that defines the crisis. In reality, the slide began around 1987 and only when government gave up on trying to nurse the banks and commercial real estate back to health and bit the bullett did things start to improve. The RTC sales actually marked the end of the crisis and beginning of the recovery.
Any move towards capitulation, recognition of losses and recirculating the assets back into the private sector would be a positive. It’s going to take down some banks but that shouldn’t surprise anyone at this point in time. The faster we move through the cycle the better. The question is, will the government allow it to happen. The jury’s still out on that one.
If you’re looking for a way to profit from this disaster, you could do a lot worse than invest in failed commercial real estate. Historically, distressed commercial properties have yielded pretty fat returns to those that picked them up at the right price. If you know what you’re doing then starting to poke around to find your own deals is not a bad strategy. If you don’t, then take a look at the players like Vornado (NYSE:VNO). There aren’t any guarantees in life but vulture CRE has about as good a track record as you can find.