It is looking more and more that we may be near or at the top. Based on my own experiences and those of others I am familiar with, buyers are now paying prices that no longer make economic sense in many cases. I just two of the situations I have been directly part of, as the bidding ended, a buyer jumped in with a 20% higher bid than the rest of us. The exact same thing happened in a Boston multi deal I am familiar with. Others tell me of similar experiences.
Pair this with the stack market debacle last week, the uncertainty of the fed about rates and thereby the economy, the massive problems in China, the new currency wars, and the collapse of commodities, and it all adds up to a chaotic world situation with makes investors fearful.
The Chinese, as opposed to what many think, are hiding their cash literally in the walls and backyard, and are fearful of getting arrested if it shows up. The Chinese government has successfully extradited one major investor form Canada and is chasing more. They are chasing 40 investors in the US despite no extradition treaty. They sometimes use intimidation with threats to arrest family members if the offender and his cash do not return. This is having a chilling impact on Chinese investment and that is exasperated by the losses many took in the stock market crash. Then all of that is compounded by the devaluation which lowers the available funds in US dollar terms by 3%. Those who assumed Chinese money will flood here in even greater amounts are wrong. It may contract in amount.
The massive losses in commodities and the currency losses in many other countries, triggered by the Chinese devaluation, and the instability in places like Turkey where the government is in turmoil, have caused even more currency devaluations. The oil barons no longer have the free cash they once did. Russians are no longer the major players they had been.
In summary, there is so much bad in the world that instead of creating a huge flight of capital to the US, those people have suffered major losses in currency and in commodities and oil such that there is a combination of fear and a simple lack of excess capital to invest. It is very unclear where foreign investment in the US goes from here.
If we combine the excessive bidding for assets now going on, and if there is a substantial pull back in foreign –and especially Chinese capital, then the combination could mean a topping out of real estate values in the US is on the horizon. It has all the signs of being there now. It is clear that while the US economy is better than it was, there is weakness in many areas. U6 is still around 10.7%, wages are flat, consumer spending is essentially flat, inflation is nil, while oil prices put more money in consumers pockets they are not spending it, capital expenditure is far below where it needs to be, and productivity is terrible. Add the loss of jobs in the oil industry, the losses sustained by devaluations for international corporations, the slow economy worldwide, and the possibility of Russian actions in eastern Europe, no good news in Iraq and Syria, and now N Korea acting out, and the level of fear and uncertainty is as high as it's been since 2008.
None of this bodes well for lots of capital continuing to pour into US real estate the way it had been.
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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.
