Local Real Estate Investors Bail-Out!

Private local real-estate investors as a group were the biggest net sellers of property last year, selling off about $4.5 billion more than they purchased, according to Real Capital Analytics Inc., a New York real-estate research firm. Their aggressive selling spree began about a year ago, shortly after interest rates began rising last April, and continues today.

SHEILA MUTO
THE WALL STREET JOURNAL, April 6, 2005; Page B6
http://online.wsj.com/article/0,,SB111274402705898964,00.html

Quote 1 - Bill Gross:

The fact is that this real interest rate journey to its current destination has pumped up all asset prices because they are all being discounted by an extremely low real interest rate. The current level has produced double-digit annual rates of appreciation for different asset classes at varying cycles—stocks and bonds first—commodities, collectibles and housing with a lag. The important point and critical element in a future forecast, however, is to recognize that real yields, whether they be short-term or further out the curve, bottomed in 2003 and have been moving higher ever since. Not only has the downward journey ended, but a mini up-cycle appears to be underway which ultimately reduces bond prices, stock P/Es and casts a negative pall on other asset classes [including real estate].

Now I am not about to forecast another black hole for stocks or any other asset class. No masochist here! But, my point is that since the lower and lower real interest rate spiral is basically over, the multiple expansions in stocks, housing, commodities, collectibles and bonds are over as well. Housing prices may go up in the future, but only to the extent that they mirror inflationary and perhaps mild demographic pressures. Stock prices may go up in the future, but only to the extent of real earnings growth (1-2 percent) and inflationary pass-throughs, assuming today’s market valuations are correct. Commodities, art, jewelry, stamps—ditto, ditto, ditto, and ditto. And when exuberant holders of these assets finally realize that all of their “investments” have a common denominator of value [i.e. yield] that has experienced its big bang, but will in future years cool and condense in a new investment return atmosphere, well then, we shall see how this world ends.

Quote 2:

As someone familiar with San Francisco commercial real estate, there are lots of private folks (ourselves included) selling into this market. It's not just the mega-players like the Shorensteins. The numbers no longer pencil out here.

It's interesting that the primary buyers are the REITs. I don't know what they're seeing that we aren't. My guess is that they are so flush with cash that they are simply "putting money to work", as they say. I suppose if you have a 10-20 year horizon, you can marginally justify buying into this rampage.

We have money to put to work too. But at these prices, we're going to pass right now. When income property actually provides an income in these parts, we may consider buying again.

Quote 3:

In the last 90 days, CalPers (The California Public Employees Retirement System) has divested of $6.5 Billion worth of shopping centers and office buildings. Makes one wonder what they know about the real estate market? Food for thought.

Also see FRB/S.F. 10/29/04 Econonomic Letter