In looking at potential transactions for our Asia clients, it is clear that even in secondary markets, low interest rates have driven cap rates to a ridiculous low level, especially for hotels. A 3.5% cap in major cities for high end hotels is in my view pushing the ceiling to bubble levels unless the investor is in for 25 or 50 years and is not in for n IRR. The Waldorf and Baccarat sales were astonishing and one has to wonder about the Waldorf deal since it required huge renovation to be done on top of the huge price. The hotel itself was in poor condition and was a last resort location for large events. In secondary cites top hotels sell now for 6%-6.5% cap rates which seems to me to be rich to say the least. Other commercial and multi deals are not much better if at all.

The debt markets are back to 2007 almost in that leverage levels are probably too high already, covenants are too loose already, and we are slowly slipping back down the slope toward bad lending, bad deals and trouble down the road. That might be several years way, but having been at this for 50 years, the pattern is the same as every past bad cycle. Lending competition heats up, as it is today, underwriters are pressured to be more flexible, deals get lost by a few basis points or leverage levels and then the next deal the losers shave basis points and underwriting so as not to lose every time. And then the slide is underway. Indicernable at first, then like lave, it just flows slowly down hill until it burns everything in its path. The young loan officers think they are smarter and doing it better, because young loan officers always think that, and they are always wrong. They really don't understand the real estate and they are under growing pressure to create volume and not lose key deals. Bonuses are at stake and they say- we are selling the loan anyway so who cares. That was what they all said in 2007.

I am not suggesting we are going to have another 2008 anytime soon. We are not, but at some future date we are going to have a reckoning and values will fall, and rates will rise and cap rates will rise. Then at some point the economy goes bad or there is another 9-11, or all out war in the Middle East, or some black swan, and then reality will once again settle in. It is never different no matter how many new regs they impose, no matter what the older guys in the business know, it makes no difference. It is clear nobody is really remembering 2008 anymore and the flood of foreign capital and historic low rates is driving the market to silly levels. The flood of foreign capital is not going to let up for a long time, low rates will continue for a few more years even as the Fed starts to raise rates, and greed never goes away. Funds need to fill their buckets, lenders need to lend, and foreign buyers just need to get their capital out of their home country to the US where they can flee when the balloon goes up at home.