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The Vultures Are Already Feasting on the Commercial Real Estate Industry

Sep. 23, 2009 11:09 PM ETARI, DBRG2 Comments
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The vultures are circling the embattled commercial real estateindustry, ready to swoop down and devour the carrion before it’s dead.A trio of REIT IPO’s have hit the market this week looking to buy realestate for pennies on the dollar, as well as the bargain basement debtof other troubled REIT’s. JP Morgan, Citibank and Barclay’s launchedtheir Apollo vehicle (ARI). Bank of America and Morgan Stanley came outwith a new security called Foursquare (FSQU). Not to be outdone, Bankof America, Merrill Lynch, Goldman Sachs, and UBS followed up withtheir Colony (CLNY) instrument. This is a classic example of new equitycoming in and taking ownership of assets where the previous owners havegone to money Heaven. Commercial real estate lending exploded from $1trillion in 1988 to $3.5 trillion in 2007, and some $2 trillion of thathas to be refinanced this year. Takers are few, with banks reeling inleverage ratios, insurance companies gun shy, and the collaterized debtmarkets in intensive care. The TALF is expiring at year end. Did I hearsomeone shout “Bail Out?” Many listed REIT’s will only survive becausetheir rules limited them to mere 2:1 leverage, and were able to raise$16 billion in new equity since March. That has helped propel the DowJones REIT Index ($DJR) up 84% from the lows. More highly leveragedprivate investors and regional and community banks not so constrainedare choking on their holdings, and many are limping on by letting markto market rules fall by the wayside. This is why I am not recommendingbank stocks or REIT’s at these levels. The new vulture issues may beanother story. I was involved in a strategy at Morgan Stanley to Hooverup Houston office buildings on the cheap in the wake of the earlyeighties oil bust. The lucky investors got a tenfold return on theircapital.

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