“If you look at the real estate investment trusts, or REITs, they’ve been soaring. All the real estate gets worse articles, Boston Properties up 38% since March 30. Really, that’s the mall guys. Federal Realty, up 44% since March 30 and up 12% since the company’s great CEO Don Wood came on the show and said the worse was over. There was a big secondary. He did well on that. Those aren’t even the biggest moves. Brandywine, that’s boy dog nancy for you home gamers, a commercial real estate investment trust with class A suburban and office properties all over the country. B is worse than A, B is bad, and C is near flunking…
That’s why you’ve seen REITs move so aggressively not just shoring up the balance sheet, but they start programs to take advantage of opportunities in the future…You say there are areas that are actually strong — New Jersey, Delaware, up 36% quarter-to-quarter. That area better than anyone else in real estate investment up 31%. Metro DC, the building mentioned today made it sound so up 4%. These are not the kind of numbers I expect to see when I read scary articles about commercial real estate getting much worse.” — CNBC’s Mad Money 8/19/2009
Mad Money Jim Cramer invited Brandywine Realty Trust (NYSE:BDN) CEO Jerry Sweeny onto the show to discuss what is going on in the commercial real estate market. The conventional wisdom holds that commercial real estate is likely the next shoe to drop. Looking at macroeconomic trends such as unemployment and widespread corporate cost cutting, it seems to make a lot of sense. Combine those macroeconomic factors with the fact that many markets were aggressively overbuilt during the boom times, and it would seem a recipe for lower occupancy rates and lower rent payments. In a relatively short time, this could put pressure on banks that have lent large amounts to construction and development and CRE financing, and when the banks suffer the entire economy feels the pinch.
That line of thinking has been widely disseminated through financial media over the past few months. However, as Cramer is quick to point out, somebody forgot to let the commercial REITs in on this conventional wisdom because they have been soaring. The media has scared away a lot of risk averse investors to REITs recently, but those that have stuck it out are starting to see things turn around according to industry insiders. Cramer admits that some of the weaker REITs will still fail under their heavy debt load, but the strongest in the group will benefit from the competition dropping off.
We think the reality is somewhere between the doom and gloom of the newspapers and the somewhat sanguine view of Cramer, but after the run up in many REIT prices we think that the risk outweighs the reward. There is still a massive amount of debt tied to CRE that will need to be refinanced over the coming months because it just isn’t worth what was paid for it during the boom. The macroeconomic factors that have frightened many investors away still remain, even if the shares have been rising. As for Brandywine specifically, we are neutral on the shares, with an expected price range of $9 to $12.