Commercial Real Estate: When the Vultures Start Flocking is That a Good Sign for the Economy?

When the vultures start flocking is that a good sign for the economy? It may seem perverse but there’s probably some truth there. That’s why I take a little bit of hope out of this article in The Deal:

When it comes to investing, especially in real estate, the conventional wisdom is the best time to get in is at the bottom. And with interest-only financing coming due in the next few years and an oversupply of commercial office buildings, now seems to be that nadir or close to it. That’s why office landlord Vornado Realty Trust is looking to raise $1 billion in private equity funds, The Wall Street Journal reports to invest in distressed properties that will likely hit the auction block in the next few years.

The article points out that Vornado is not alone. PE real estate firms have announced $253 billion of fund raising plans for 2009 with $92.5 billion targeted for distressed real estate. These guys naturally smell bargains but they probably also give an early signal about the commercial real estate market.

Recall the S&L collapse and the commercial real estate collapse that was part and parcel of the debacle. Most people tend to focus on the, say, 1991 to 1993 time frame when the RTC began to dispose of their assets. That becomes the time frame that defines the crisis. In reality, the slide began around 1987 and only when government gave up on trying to nurse the banks and commercial real estate back to health and bit the bullett did things start to improve. The RTC sales actually marked the end of the crisis and beginning of the recovery.

Any move towards capitulation, recognition of losses and recirculating the assets back into the private sector would be a positive. It’s going to take down some banks but that shouldn’t surprise anyone at this point in time. The faster we move through the cycle the better. The question is will the government allow it to happen. The jury’s still out on that one.

If you’re looking for a way to profit from this disaster, you could do a lot worse than invest in failed commercial real estate. Historically, distressed commercial properties have yielded pretty fat returns to those that picked them up at the right price. If you know what you’re doing then starting to poke around to find your own deals is not a bad strategy. If you don’t then take a look at the players like Vornado. There aren’t any guarantees in life but vulture CRE has about as good a track record as you can find.

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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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