REIT Wrecks » Investing in REITs http://gdmig-reitwrecks.com High Yield REITs And Commercial Real Estate Thu, 28 Apr 2016 02:18:47 +0000 en-US hourly 1 https://wordpress.org/?v=4.2.30 Long Odds For Apartment Owners In Vegas; Prices Down By At Least 60% http://gdmig-reitwrecks.com/2009/10/long-odds-for-apartment-owners-in-vegas.html http://gdmig-reitwrecks.com/2009/10/long-odds-for-apartment-owners-in-vegas.html#comments Mon, 12 Oct 2009 10:00:00 +0000 http://reitwrecks.com/wordpress/?p=308

If you are investing in REITs right now, life is good. The US MSCI REIT index has doubled since hitting its lows in March, and in the second quarter Mid America (MAA) generated $.05/share in earnings from the sale of just one asset, a 36 year old, 96 unit apartment building in Grenada, Mississipi. Indeed, gambling on a little property in Grenada, Mississipi looks like a much safer bet right now than rolling the dice in Las Vegas, the gambling capital of the world.

Las Vegas is so volatile that 2009 transaction volume has dropped almost to zero, and prices prices appear to have declined by at least 60% from the peak. However, with virtually no sales taking place, it’s hard to know what the market is. Amazingly, sales by dollar volume in Las Vegas have plunged by 99%, from almost $2.5 billion in 2005 to just $25 million for all of 2009:

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Although only one sale had taken place through August, GlobeSt.com reported that in September, a 352-unit, 20-year-old apartment complex was sold in a short sale for $15.6 million. This price represents a 58% decrease from 2006, when the property last traded for $36.8 million. While a 58% decrease in value is frightening, it appears to be mild compared to where it could have traded.

The buyer, a San Diego socialite, was somehow convinced to pay a 5.5% cap rate on trailing-three-month NOI and a 6.1% cap on a trailing 12-month NOI. Even more incredibly, because the property was only 65% occupied by the time the sale closed, no lender would touch it, and the purchase had to be an all-cash deal. Can you say no competition?

Given the crummy fundamentals in Las Vegas, this sale is yet more evidence that the distress in commercial real estate may be cushioned by patient capital much more so than some currently expect.

Apartment values in New York City have declined at least as much as in Las Vegas. As I wrote earlier this year, the yawning gap between cap rates and GRMs means that New York City apartment values are heading in but one direction: Staten Island.

The Riverton, a massive 1232 unit behemoth of bricks that was purchased in 2006 for $340 million, is a great example. The buyers purchased the property using a first mortgage with day one debt coverage of .39x, which meant that the loan had absolutely no hope of being paid through existing cash flow.

Of course, the CMBS loan promptly became delinquent and the property is now in the hands of its special servicer, appraised at $108 million barely three years after Deutsche Bank wrote a check for its $225 million first mortgage. And the REIT goes on!

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]]> http://gdmig-reitwrecks.com/2009/10/long-odds-for-apartment-owners-in-vegas.html/feed 0 No Bottom In Commercial Real Estate Until 2010 – 2011 http://gdmig-reitwrecks.com/2008/12/commercial-real-esate-to-bottom-in-2010.html http://gdmig-reitwrecks.com/2008/12/commercial-real-esate-to-bottom-in-2010.html#comments Sat, 20 Dec 2008 22:49:00 +0000 http://reitwrecks.com/wordpress/?p=170

The good news is that the end is near, and I’m not talking about the rapture. Mercifully (unmercifully?), Moody’s said Friday that commercial real estate is going to get a whole lot worse before it gets better, but that it WILL get better. Unfortunately, that won’t be until 2010, at the earliest.

For now, Moody’s says that the deepening recession and the reduced availability of financing have heightened the risks for the US commercial real estate sector no kidding. The ratings agency cites the retail sector as most exposed to very tight-fisted U.S. consumers, but the gloomy picture they paint is the product of a very broad, thick brush: they say virtually no asset class will escape unscathed.

The hotel sector is clearly in the middle of the storm, as is retail, but demand for office space is also declining in many markets and industrial properties have been adversely affected by slowing trade and retail sales. Even multifamily (apartment) properties face trouble. It’s true that everybody needs a place to live, but Moody’s says there will be fewer “everybodys”.

Reduced household formation, a fancy euphemism used to describe the impacts of children moving back in with parents, other parents moving in with their kids, friends sleeping in closets, and in some cases, dogs and cats relinquishing the kennel to their masters, all combined with growing unemployment and the increasing supply of rentals in the “shadow market” of foreclosed homes, will create stress even at this level in Maslow’s hierarchy. For a little more dark humor on this topic, check out Public Storage: Sold on Craigs List!

Loan defaults will increase as well, but they’ve been at historical lows for so long this was inevitable. Moody’s expects the aggregate default rate on CMBS loans (0.75% as of November 2008) to revert to its long-term historical average of 1.5% to 2.0% in 2009, and most likely to surpass this level before the market begins to form a bottom in 2010 and 2011. They also expect commercial property values, which have declined about 10% from the peak reached in October 2007, to decline an additional 10 to 20% over the next 18 to 24 months.

Other than that, I’m assuming they would also like to wish everybody a happy and prosperous holiday season.

Click here for the full Moody’s press release on commercial real estate.

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Disclosures: None at the time of publication
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