Real Estate: Modern Fundamentals

As I think about the dominance of the dinosaur and the 40 plus million years they roamed the earth, there is a clear sense of power. It is all the more powerful to think of the preserved history that lies within the tar pits and the level of destruction that must have occurred on earth to drive these magnificent creatures to their demise.

In modern times, the story begins with Macklowe and the GM (GM) building. In 2003, the GM building went to auction for a record price of $1.4 billion. By mid 2007, at the perceived height of the credit crisis, the heralded purchases of EOP were entering the tar pits. With one foot in, Macklowe stood strong buttressed by the GM building and a history of escape.

Goldman Sachs (GS) projected declines in the value of commercial real estate of 14% in 2008 and 12% in 2009. The CMBS market halted, Bear Sterns (BSC) collapsed and the bubbling black tar engulfed the housing market and the mortgages within.

Having forecasted the most devastating decline of commercial real estate since the Great Depression, Goldman Sachs is back seeking to acquire the GM building. Too surreal to comprehend, such a bold move deserves our full attention.

With the emergence of modern fundamentals and the Rexx Index, the Fair Market Value of the GM building can be determined without NOI and the elimination of building specific risk. These factors are critical in the development of the property derivatives market. ISE/Eurex seized this opportunity and licensed the Rexx Indices for trading options on its Alternative Markets.

In 2003, Rexx NYC Midtown Total Return stood at 269.10, when the GM building was purchased for its record price of $1.4 billion. At the end of 2007, the Rexx NYC Midtown Total Return was at 601.81 yielding a total return of 123.64%, pricing the GM building at $3.13 billion.

The reason Goldman Sachs is seeking to acquire the GM building at the proposed $2.8 billion purchase price is because the deal makes sense. With lower interest rates, inflation rising and stable rents, the purchase of the GM building for less than $3.13 billion is at a discount. Market sentiment has lowered expectation, but the numbers tell a different story.

Until the Fed raises rates, inflation eases or rents decline, sellers should be holding onto their properties. Cap rates have compressed since the crisis and with two feet in the tar pit, there are few options left for Macklowe. Maybe he can convince Goldman Sachs to write an option on Rexx and make yet another great escape.

Comments

[CHM97:]

"Having forecasted the most devastating decline of commercial real estate since the Great Depression, Goldman Sachs is back seeking to acquire the GM building. Too surreal to comprehend, such a bold move deserves our full attention." ....... That is too funny.....LOL.... next we will find Goldman calling for $200 oil and SHORTING!

2008 May 23 10:55 AM