Commercial Real Estate Bust or Buying Opportunity? You Pick

The dichotomy that surrounds the real estate crisis in the United States can be encapsulated in two news reports during the past three days.

First, billionaire mogul Sam Zell added significantly to his holdings in Starwood Hotels and Resorts (HOT) to become that company’s second-biggest shareholder. In response, James Corl, the chief investment officer fo r real estate securities at Cohen and Steers Inc., expressed optimisim when he told Bloomberg News: “Sam Zell as a seller started the REIT market decline last February and I think Sam Zell as a buyer probably marks the bottom in real estate stocks.”

But even before investors could breathe a sigh of relief or contemplate their next move into the market, the headlines in Friday’s Wall Street Journal screamed “Commercial Real Estate Bust”. Based on a report released last week by the Massachusetts Institute of Technology and the dire warnings of a New York University economist, the Journal declared that the property investment market is about to go under.

“The coming bust of commercial real estate will lead to another round of massive losses for the banks who made these loans and the investors who bought these toxic mortgages,” said Nouriel Roubini of NYU. “The financial markets massacre is just starting and a generalized liquidity and credit crunch will become full-blown in the next few months.”


Who to follow? Zell, who has famously sat on the sidelines as the world’s credit burned, or Roubini, who does get kudos for sounding alarm bells last year prior to the subprime mess?

Two points need to be raised. One, commercial real estate loans didn’t go to the people who didn’t know what they were getting into. While commercial foreclosures may occur, the more likely scenario is valuable land will be snapped up quickly by shrewd investors. Second, construction in America isn’t slowing. In December, the Census Bureau reported that nonresidential construction was up 20% year-over-year.

Also, the MIT report mentioned in the Journal indicated there was a 7% drop in commercial property prices during the second half of 2007, but that was after a five-year run up and the drop came amid the decline in seemingly every asset but gold.

In these times when mediocre economic news quickly becomes warnings of doom, many pundits have already positioned commercial real estate market on a cliff. If they’ve done so hastily, you can be sure investors like Zell will take advantage of undervalued properties.

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