The various crises around the world make predicting anything very difficult now. It is clear N Korea just wants more attention and payoffs, and China is happy to have us support the north so they don’t have to. In the end it is likely that situation will continue with no change and periodic flare-ups. Europe and the Euro is another story entirely.
It is clear the PIIGS were gluttons and they will go back to being small counties with troubled economies for many years. This is nothing new for them or Europe. There is a history of these sorts of problems going back hundreds of years. Europe is yesterday’s news and the decline of the area will continue unabated. The world is shifting its epicenter and Europe is destined to not be a major factor in the economic events of the future. Germany will be a factor, and the UK will retain some impact, but the rest of Europe simply is a sideshow.
The only issue is whether the Euro continues to exist or if the strains which were always inherent in the union are finally to break point. Reality is most of Europe needs to devalue to be able to go forward, and that will inevitably happen. Germany cannot devalue, so there is the break point. In short, Europe is not where you want to be buying assets at this time. The uncertainty is just too great.
What does this mean? Commodities and assets in growing countries are where investors will go with capital. The dollar is still a store for safety but it is becoming less so as the Obama administration fails to do the things needed to grow the economy, and as the deficit continues to eat the future. I do not believe that the next two years will be good for the economy so far as Washington is concerned. Nancy and Harry are still there in power positions. They will do their very best to continue the destructive policies of the past few years.
The regulators appointed by Obama, like the head of the labor Relations Board, will continue to push through rules which will badly harm business, while the deficit will continue to rise. None of this is good for US real estate. We make money when the economy is strong and the capital markets are functioning well. Not when Washington continues to do things that are detrimental to growth and free market capitalism.
Based on deals and restructuring assignments I am involved with, it is clear that most owners believe the worst is over and if they can just get to 2013, then all will be well and refi can occur. They may or may not be right. The black swans are landing, more are circling, and the future is not at all clear. Risk is still very much the prevailing issue. Iran is still a wild card. Terrorism is still a major threat -- just look at Portland this week. Based on my conversations with many capital providers and investors all across the country, caution is the mantra, while hope springs eternal. Unfortunately there is no real leadership out of any part of Washington, or Europe. Russia and China continue to be uncooperative on Iran and N Korea. Lurching from crisis to crisis seems to be what we can expect until 2012. None of that is great for real estate value enhancement.
While debt is back and some lenders are getting much more aggressive, this is not yet anywhere near the capacity needed to really provide a strong and wide capital market to really solve the maturity and value issues. Values will continue to rise, but given all of the risks mentioned above, and the lack of sufficient capital to fully meet the needs of the market, that rise will likely slow over the next two years. Interest rates will rise within two years, and so will cap rates. So It is unclear just how much values will continue to rise by 2013. There is little visibility.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
