The black swans continue to darken the sky. There are just so many major events and issues now that the enthusiasm we saw in January has been replaced by another decline in optimism and concern. On the other hand, there is so much cash in so many pockets, that deals continue to happen just because nobody knows what else to do with it all. For the most part, real estate is looking like the good place to be for the medium term. It is off the bottom and if bought right will pay a return in excess of what is otherwise available. There is a solid physical asset that you can see and manage. Barring the unforeseen it will not get affected overnight by events in Yemen, Syria or even Washington. Values may not go up much in the short term, but the chances of a material decline in value from here are low unless you are over paying for hotels.
The swings in the stock market are substantial on a daily basis and re subject to so many black swan events, that are out of your control, that you never can be sure what the value really is. You have no ability to affect value in any way. The problem now is that core office is likely no longer a good long term investment. It has been bid too high in the race for security with too much cash chasing too few deals. Multi is similarly over priced in some markets for similar reasons and now new development of multi makes sense in some places since the demand is there and often you can build to an 8% cap vs buying at a 5% cap. Mutli is not complicated to construct so the development risk is not terribly high in many markets.
A lot of US fund money is running to Europe to take advantage of all of the distress in that area. It is not at all clear that is a good strategy at this time. Greece is going to need a restructure at some point, as will Ireland and Portugal and possibly Italy. The make believe world of the EU is shattered but nobody is willing to admit it. They will continue to patch and wire it together for awhile, but in the end the whole Euro concept never made any sense and it will unravel at some point. The cultural and political differences are so great that there is no way it can be held together. It will take a long time, but for the short term it will just be bailing wire and bubble gum and when things come apart, investments in Europe will not look so good. To me there is huge inherent risk in Europe which is not predictable for several years.
Japan is toast. It is not going to change its culture either ands as a result it is not going to suddenly become this wonderful growth story once again. Their cultural problems of how they deal with problems-or fail to- was fully on display in the nuclear accident which they had the engineering capability to solve but not the cultural basis to do it right. Everything had to be consensus and keeping the truth hidden so as not to embarrass, and the result is the world has paid a price, but Japan paid a huge price.
It is going to take years for the Mid East to get sorted out. Nobody can predict where all of this will end, and who will run what countries. It is pretty clear that Yemen is going to be in turmoil and the terrorists will have a home there for some time. Syria will continue to move to more turmoil and eventually Assad has to go. There is no way the Israelis are sitting with Hammas to agree borders and peace terms. Egypt is heading to be more Islamic and it is not at all clear that the revolution was anything more than a way for a new corrupt group to take power. The whole area is a mess for a very long time.
One can go on around the world, but none of it is good. So that leaves the US. Clearly the circus in Washington shows no sign of resolving itself until the next election. Obama and Harry Reid refuse to admit reality of the deficit, entitlements and healthcare solutions. Elizabeth warren continues to wreak havoc on the banking system and various attorneys general think it is good to bash and fine the banks, and have no understanding of the damage they are causing to the economy by these attacks.
You can’t sit with cash and gold is in a bubble. So in the end a solid piece of real estate in the US, bought at a fundamentally good price in a sound market is likely as good an investment as you can make these days. With all the caveats I have written about over the past weeks. AC
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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.
