Dozens of experts claim that commercial real estate is toast for 2010. But look more closely, and you'll see at least 6 real-estate investment trusts worth buying into now.
About 2,000 years ago, the decider of all matters of importance in Jerusalem was the Great Sanhedrin, a council of 71 judges. The council (or part of it) met every day, except on festivals and the Sabbath, and was a combination of something like the Supreme Court, Congress and CNN's "Situation Room."
As you can imagine, the Sanhedrin's members normally disagreed as they hammered out their daily opinions. But occasionally they came to a unanimous decision, and they had an amazing and very wise rule when that occurred: The decision was immediately overturned because the sages believed that a unanimous conclusion among so many individuals just had to be wrong.
I was thinking about this rule while reading about five dozen 2010 forecasts over the recent holiday break. I was struck by the fact that if there is one idea around which you can get at least 90%, if not quite 100%, agreement from the world's financial punditocracy, it's that commercial real estate, often referred to as CRE, is bound to be annihilated this year.
The experts observe that dozens of large buildings and shopping centers are mostly empty in cities large and small, vacancy rates are high and rising, many supersized mortgages are coming due soon and several big buildings are already on the verge of foreclosure.
Close-up view: In Seattle this month, I was offered twice my current office space in a much better building at a third of the rate I'm paying now if I would agree to sign a four-year lease. That's desperation. Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids= f56abdbf-1f9c-4a68-80e8-91bed5664958,b15c2390-e2e1-427a-ad27-afcde63c18b5,4a4c5035-bee8-468f-aa99-52279799f822,8ad3b1b2-feb3-40ad-8a9d-3cb9ae3265fd", "player.fr": "iv2_en-us_money_article_Investing-JubaksJournal-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=f56abdbf-1f9c-4a68-80e8-91bed5664958,b15c2390-e2e1-427a-ad27-afcde63c18b5,4a4c5035-bee8-468f-aa99-52279799f822,8ad3b1b2-feb3-40ad-8a9d-3cb9ae3265fd;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');Yet strangely -- you could almost say perversely -- shares of the big real-estate investment trusts, or REITs, that own many of the country's skyscrapers, shopping malls, industrial parks, hospitals, senior housing centers, medical buildings and shopping centers are showing great resilience. How can this be?
It looks to me like you need to score one for the Sanhedrin, because the nearly unanimous skeptics appear to be missing a few key pluses about REITs that make them a good investment. I'll identify a few favorites in a moment.Land grab First, as long as the credit market is willing to keep rolling over most property owners' debts with new low-interest loans or bonds, and as long as the equity market is willing to let REITs sell more shares from time to time, their problems can be pushed out to a future point when the U.S. economic recovery finally gets real traction.
This is where the new credit bull market -- the greatest in 25 years, by the way -- comes in. Pension funds worried about industrial companies and iffy sovereign bonds crave the high levels of dividend income that REITs, by law, uniquely provide.
Second, bears forget that REITs are unlike most other companies in that they own real landmark assets in real cities that have real value and have truly been crushed in price. If you are the portfolio manager of a large sovereign wealth fund or run a $20 billion portfolio at a big insurance company, you need to buy real, big things at low values to make a difference in your portfolio.
Get started in REIT investing
Let me put it this way: Would you rather buy paper shares of a technology company that could lose its innovation edge at any time? Or half a block of Manhattan at a 50% discount? Yeah, me, too.I heard this angle from a friend who attended a Goldman Sachs-hosted hedge fund dinner recently. He learned that the big sovereign wealth funds and insurance companies, which had representatives at the dinner, are among the quiet but big bidders for major hunks of prime U.S. real estate through private-equity funds, private transactions and public-equity companies.
They apparently believe that the only real problem with U.S. commercial properties is their underlying high-cost debt. So to the extent that they can take out the debtors with cash, they can wait out the rest of the property recession and be ready for the next upswing. This is the advantage of being well-capitalized and having a 20-year time horizon.
At the same time, REITs that zealously guarded their cash during the recent downturn are themselves helping to lift commercial real estate out of its epic slump. The Globe and Mail newspaper in Toronto reported last week that $5.4 billion had been spent on 990 transactions in the Toronto area alone last year, as strong REITs pounced on distressed properties owned by their weaker brethren.
"REITs are in a good position today as capital, which is the life blood of the sector, is both cheap and plentiful. I think they are in a sweet spot and will be major buyers during the course of 2010," Michael Smith, an analyst at Macquarie Securities, told the newspaper.
Foreign and pension fund buying is more likely behind the surprisingly solid upturn we see now in REITs such as New York property giant SL Green (SLG, news, msgs). As the old Rodgers and Hart song said,"I'll take Manhattan, the Bronx and Staten Island, too."
Continued: A train wreckMore from MSN Money
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Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=6.747127; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=348;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board More From Jon MarkmanSign up for Jon's new daily newsletter service.Join the discussion in the MSN Money SuperModels Community.Follow Jon on Twitter.Recent Articles by Jon MarkmanGet ready for the Roaring '10s 12/31/2009Go east (and south), young man 11/18/2009New crisis ahead? 5 things to watch 11/11/2009more...Decision CentersStart InvestingMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingMSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalSuperModelsTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersFund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='vf6bg7iffc4b5pq44i0hu9fbym08b73n';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Join the discussion!Add a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 10 of 20PreviousNextanonymous888 #1Monday, January 25, 2010 8:23:26 PMSuper STAGFLATION, thats what is happening, high unemployment and high inflation, get the real inflation numbers not the Mickey Mouse numbers from the Government ReplyReport Abusescrub01 #2Monday, January 25, 2010 10:24:18 PMStagflation? Don't you need high inflation AND high unemployment? Last I checked, in 2009, 8 of 12 months were negative inflation. Lower prices is typical for recessions, and period of time that follows. Inflation is definitely in our future, maybe 2 years out or longer, but not now. There is no stagflation.However, I will say that Markman is usually in a world of his own. He, along with other "financial experts" are usually in the dark when it comes to the reality of our economy. There are many underlying factors that are often ignored, which will prevent or delay the so-called recovery from transpiring in the timeframe that the experts and the government would like. I'm not being pessimistic, and I would like to see a quick and stable recovery like we all would, but we all need to take responsiblity for how we face the future, and it starts with facing the true reality of our new economy (or lack of).ReplyReport Abuseme2159 #3Monday, January 25, 2010 10:26:17 PM....how about this mornings news that the owners of Peter Cooper Village and Stuyvesant Town, consisting of 110 buildings with 11,000 apartments pulling the plug and handing the keys over to the banks that hold the mortgage? And that's in Manhattan. Another $5.4 billion REIT mistake? It seems that they couldn't quite make it work despite the best location and tons of borrowed money.ReplyReport Abusebill s #4Monday, January 25, 2010 11:34:15 PMAmazing how many people are able to delude themselves in the real estate market. If this was typical or even bigger than typical cycle that would be one thing, but this is structural.
When I worked at Merrill Lynch 25 years ago, I remember them paying IBM almost $50,000 for a color copier, and it took 2 weeks and 2 people to train the copy person to use the machine. I just bought a Canon machine that will outperform that IBM machine in every way for $70. You used to have to go to an office to share in the use of this expensive equipment. Now you have a magnficent home office for less than the cost of gas and parking for 2 months. Why spend an extra 3 hours a work day dressing, driving, parking, and walking. You spend three hours a day and pay 1-2 thousand per month for the gas , parking, rent, to lose those 3 hours.
The internet has changed the real estate market.
Look at all the empty industrial buildings. The mid level distributors are all going or gone. You buy it on the internet and it is drop shipped from the factory. How can anyone paying rent compete with some one who pays GoDaddy pocket change each month and pays no rent? And somehow the remaining businesses, hanging on by their fingernails trying to compete with non rent payers are going to pay even more rent? In spite of hugh vacancy rates? And of course the empty buildings mean nothing, because supply and demand means nothing. Great delusion
ReplyReport AbuseJ12120 #5Tuesday, January 26, 2010 5:15:35 AMAnalysts and fortune tellers. They both make it up as they go along and some people continue believe what they have to say. PT Barnum's "there's a sucker born every minute" needs to be updated to "there's a huckster out there for any product and no shortage of idiots to buy it".
ReplyReport Abusepghgator #6Tuesday, January 26, 2010 6:11:00 AMOne thing is certain, when an MSN reporter advises you to do something...do the complete opposite! ReplyReport Abuseneb92 #7Tuesday, January 26, 2010 6:15:01 AMBuild Build Build... I was deep in a trade in 2003 when I decided to go to law school, and man am I glad I did it. All these financial people think is building. It will never happen like that again so we might as well get used to it. Time to think outside the box. We should maybe create some jobs aiming at quality services for people, and perhaps work on slimming down hours worked for full benefits and a decent salary in order to get more jobs out there for the poor people who are really struggling.
I rent out some apartments and the level of poverty is worse than I have ever saw (about 20 years that I have paid close attention.)
And about inflation: If you pay attention, the prices for groceries, clothes, and gasoline are definitely showing a long term trend of UP.
ReplyReport AbuseMESIMPSON #8Tuesday, January 26, 2010 7:53:31 AMThis is the advantage of being well-capitalized and having a 20-year time horizon.
Isn’t this what smart commercial real estate investing has always been. Suddenly, Wall Street is enlightened by their revolutionary discovery of a 50 year old practice. Now all they have to do is figure out how to repackage and resell that advice to all their clients, again!
ReplyReport AbuseDavenport5080 #9Tuesday, January 26, 2010 8:08:36 AMAs every day goes by it seems to look more and more as if we are heading in the same direction as Japan during its real estate boom. If this is the case, does Markman's comments hold water?ReplyReport AbuseMESIMPSON #10Tuesday, January 26, 2010 8:22:41 AM.. REITs lost 90% of their value in the bear market. Dimon went on to note that investors specializing in distressed debt and foreign buyers have been attracted by the lower prices, which has helped refinancing activity.
Never mind that guy over there who lost his shirt speculating on commercial real estate investments way back 2007. At these prices, you can’t go wrong, and I’ve got the perfect variable rate mortgage so you to get in on it too.
ReplyReport Abuse1 - 10 of 20PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/SuperModels/the-sages-are-wrong-about-real-estate.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*It looks to me like you need to score one for the Sanhedrin, because the nearly unanimous skeptics appear to be missing a few key pluses about REITs that make them a good investment. I'll identify a few favorites in a moment.Land grab First, as long as the credit market is willing to keep rolling over most property owners' debts with new low-interest loans or bonds, and as long as the equity market is willing to let REITs sell more shares from time to time, their problems can be pushed out to a future point when the U.S. economic recovery finally gets real traction.
This is where the new credit bull market -- the greatest in 25 years, by the way -- comes in. Pension funds worried about industrial companies and iffy sovereign bonds crave the high levels of dividend income that REITs, by law, uniquely provide.
Second, bears forget that REITs are unlike most other companies in that they own real landmark assets in real cities that have real value and have truly been crushed in price. If you are the portfolio manager of a large sovereign wealth fund or run a $20 billion portfolio at a big insurance company, you need to buy real, big things at low values to make a difference in your portfolio.
Get started in REIT investing
I heard this angle from a friend who attended a Goldman Sachs-hosted hedge fund dinner recently. He learned that the big sovereign wealth funds and insurance companies, which had representatives at the dinner, are among the quiet but big bidders for major hunks of prime U.S. real estate through private-equity funds, private transactions and public-equity companies.
They apparently believe that the only real problem with U.S. commercial properties is their underlying high-cost debt. So to the extent that they can take out the debtors with cash, they can wait out the rest of the property recession and be ready for the next upswing. This is the advantage of being well-capitalized and having a 20-year time horizon.
At the same time, REITs that zealously guarded their cash during the recent downturn are themselves helping to lift commercial real estate out of its epic slump. The Globe and Mail newspaper in Toronto reported last week that $5.4 billion had been spent on 990 transactions in the Toronto area alone last year, as strong REITs pounced on distressed properties owned by their weaker brethren.
"REITs are in a good position today as capital, which is the life blood of the sector, is both cheap and plentiful. I think they are in a sweet spot and will be major buyers during the course of 2010," Michael Smith, an analyst at Macquarie Securities, told the newspaper.
Foreign and pension fund buying is more likely behind the surprisingly solid upturn we see now in REITs such as New York property giant SL Green (SLG, news, msgs). As the old Rodgers and Hart song said,"I'll take Manhattan, the Bronx and Staten Island, too."
Continued: A train wreckMore from MSN Money
1 | 2 | next >
Amazing how many people are able to delude themselves in the real estate market. If this was typical or even bigger than typical cycle that would be one thing, but this is structural.
When I worked at Merrill Lynch 25 years ago, I remember them paying IBM almost $50,000 for a color copier, and it took 2 weeks and 2 people to train the copy person to use the machine. I just bought a Canon machine that will outperform that IBM machine in every way for $70. You used to have to go to an office to share in the use of this expensive equipment. Now you have a magnficent home office for less than the cost of gas and parking for 2 months. Why spend an extra 3 hours a work day dressing, driving, parking, and walking. You spend three hours a day and pay 1-2 thousand per month for the gas , parking, rent, to lose those 3 hours.
The internet has changed the real estate market.
Look at all the empty industrial buildings. The mid level distributors are all going or gone. You buy it on the internet and it is drop shipped from the factory. How can anyone paying rent compete with some one who pays GoDaddy pocket change each month and pays no rent? And somehow the remaining businesses, hanging on by their fingernails trying to compete with non rent payers are going to pay even more rent? In spite of hugh vacancy rates? And of course the empty buildings mean nothing, because supply and demand means nothing. Great delusion
Analysts and fortune tellers. They both make it up as they go along and some people continue believe what they have to say. PT Barnum's "there's a sucker born every minute" needs to be updated to "there's a huckster out there for any product and no shortage of idiots to buy it".
Build Build Build... I was deep in a trade in 2003 when I decided to go to law school, and man am I glad I did it. All these financial people think is building. It will never happen like that again so we might as well get used to it. Time to think outside the box. We should maybe create some jobs aiming at quality services for people, and perhaps work on slimming down hours worked for full benefits and a decent salary in order to get more jobs out there for the poor people who are really struggling.
I rent out some apartments and the level of poverty is worse than I have ever saw (about 20 years that I have paid close attention.)
And about inflation: If you pay attention, the prices for groceries, clothes, and gasoline are definitely showing a long term trend of UP.
Isn’t this what smart commercial real estate investing has always been. Suddenly, Wall Street is enlightened by their revolutionary discovery of a 50 year old practice. Now all they have to do is figure out how to repackage and resell that advice to all their clients, again!
Never mind that guy over there who lost his shirt speculating on commercial real estate investments way back 2007. At these prices, you can’t go wrong, and I’ve got the perfect variable rate mortgage so you to get in on it too.
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