Pointing to either the Moody’s or the Green Street indexes as being indicative of values will not prove to be a good indicator of anything more than another set of numbers with no real indicative basis for the average buyer or seller. In fact, the dramatic difference between the two should tell you on its face that nobody knows the right answer at the moment.

Moody’s vs Green Street-The Value Battle- they are both wrong

Moody’s and Green St have each recently released studies purporting to show where values are. Moody’s says still low, while Green St says way up. Neither makes any sense. First, there is no real way to know what anything is worth now since there are so few trades they do not constitute a market comp. Second, many are distress deals or are bid auctions where too much money is chasing too few deals so the supply/demand factors are completely skewed and the result meaningless for the broad base of assets. Third, REITs are the main buyers, and based on specific deals I have seen, they are way over paying just because they need to spend all that capital they just raised, and their cost of capital is well below the ordinary real estate buyer capital cost today. Fourth, with interest rates at virtual zero and inflation at maybe 1%, there is a complete distortion of cap rates. Fifth, leverage is generally unavailable for the average deal so just because a major buyer of a New York building got cheap debt is no indicator of the debt markets for the average investor. Sixth, most notable deals are taking place on the coasts in major cities. There is a complete bifurcation between those deals and the rest of the country. It is as though there are two different countries-New York, DC, and a few other cities, and then that other country west of the Hudson River. Deals for Shorenstein trophy office buildings in Manhattan have nothing to do with selling a 100,000 sq ft retail center in Tulsa.

Moody’s claims they track everything over $2.5 million. That means they track all the very distressed sales as well as others. There is no weighting of each and no real way to sort the data to see what is a true sale vs a lender or pressured owner dumping an asset. It is likely that Moody’s data is biased to the negative and it is very clear Green Street is heavily biased to the upside and just as unrealistic. Green Street talks to a lot of REITs and brokers. Neither is a realistic source of data that means anything for the rest of the owners and investors.

I am one of those that believes something is worth what someone else will pay for it and close at, as opposed to offers to get it off the street to be retrade down after due dili. Brokers, by definition, will always over state the optimistic side. Appraisers are worthless to get to real values just by the nature of how they get to their numbers. Several have admitted when challenged that they “reflect the froth in an up market and the negative in a down market”. In short, they start with the answer and then create numbers to justify it. One leading hotel appraiser has actually forecast that hotel values in 2015 will be 140% higher than they were in 2007 at the peak. That should convince you never to read another appraisal.

Bottom line is, nobody really knows what the broad base of real estate assets is worth yet. There needs to be an active market with billions of dollars of trades of all property types all across the country, in a more normalized financing market, with interest rates at a level where the ten year is maybe at 5%, and inflation is at 3%. To say a trophy building in Manhattan is indicative of anything is equal to saying a 100 room hotel in serious distress in Omaha is indicative of anything. Neither is indicative of much beyond itself. There are billions of dollars of assets coming to market form servicers and banks and owners under pressure over the next two years, and then we will see where things really settle at. My prediction is there will be far more assets on the market driving down values over that period, and the cost of capital will rise from here. It is nice to say I got sub 5% or sub 6% debt, but what are you going to do in 5 years when you try to sell the asset and the buyer has a rate of 7% or 8% at 70% leverage, and an equity return hurdle of 15% or 18% in a market where values have already risen materially. His perception of discounted present value will be very different.

Pointing to either the Moody’s or the Green Street indexes as being indicative of values will not prove to be a good indicator of anything more than another set of numbers with no real indicative basis for the average buyer or seller. In fact, the dramatic difference between the two should tell you on its face that nobody knows the right answer at the moment.