Here is an absolutely fascinating analysis of the commercial real estate market as posted in Seeking Alfpha, entitled Real Estate: Modern Fundaments.

A Historical Analogy: As we 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.

Just like the dinosaurs ultimate deminse, what forces would be required to devistate the commercial real estate market and drive it deep within the tar pit?

In modern times, and within the evolution (or de-evolution) of the commercial real estate market, the story begins with Harry Macklowe and the General Motors (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 Equity Office Property Trust (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 projected declines in the value of commercial real estate of 14% in 2008 and 12% in 2009.  
• The CMBS market halted, Bear Sterns 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 (FMV) of the GM building can be determined without Net Operating Income (NOI) and the elimination of building specific risk. These factors are critical in the development of the property derivatives market.

•  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 Devil (and ultimate answer) lies within the numbers: 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. The fundamentals are there and the numbers make sense.

With lower interest rates, inflation is 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. Don’t they always?

Here is the lesson to learn: Until the Fed raises rates, inflation eases or rents decline, in many CRE minds, sellers should be holding onto their properties. What do you think?

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Posted in Developers, CMBX, Historical Perspective, Annual Recap, Market Trending, Commercial Real Estate | 2 Comments