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BREAKING NEWS
February 9 2007
Skyscraper Prices Head for the Clouds
Didn’t property-flipping die a painful death when the red-hot real estate markets of Florida and Nevada ran out of steam? Not, it seems, when it comes to office skyscrapers.

Only hours after Blackstone secured the world’s biggest buy-out by paying $39bn for Equity Office Properties, word was out that it flipped a portfolio of Manhattan office buildings bought with Equity Office to a fresh owner for $7bn.

Of course, Blackstone is no two-bit real estate speculator. The properties it sold on are as far as you can get from an off-plan condo in the sun belt. For a start, New York offices physically exist and have rent-paying tenants. Detailed financial forecasts underpin such deals, not vague hope that a greater fool will come in and pay a higher price.

But animal spirits still play an important role. And, while they have died down among mom-and-pop residential speculators in most parts, they are rising in commercial property. Valuations have been hitting records for months.

Cap rates – rental income from a property portfolio divided by price paid for the assets – are scraping new lows. Factor in the capital spending required to keep a building in shape, and the figure falls as low as 4.3 per cent – far below the 4.8 per cent yield on offer from risk-free 10-year Treasury bonds.

There are, of course, fundamentals underpinning this. Demand for office space is strong, while new construction has so far been limited compared with previous cycles. But that does not remove a sense that rising prices are beginning to dim investors’ memories of the reality of real estate cycles. Even the fastest-rising tide eventually turns. Which takes us back to Blackstone. One of the forces that has fuelled the boom in commercial real estate, alongside other asset classes, is the ocean of cheap debt. It is no coincidence that in 2006 there were $81bn of announced cash deals among quoted real estate groups, according to Dealogic. That is nearly 3½-times any year in the last decade.

Cheap debt has helped fuel a virtuous cycle. Blackstone’s Equity Office deal, for example, is risky given the debt mountain required to fund it. Viewed like that, the craze in office real estate is less detached from games that went on in residential property than investors might think. While it is based on sound foundations – just as the residential property boom was long underpinned by low interest rates and favourable demographics – there comes a point when confidence that prices will keep rising drives the market.
The Financial Times

Real Estate Shares Drop
U.S. stocks extended their worst weekly decline since December as rising homeowner defaults contributed to a selloff in builders and mortgage lenders.

Real estate stocks slumped for a third day, sliding 2.2 percent. The shares had led the &P 500 higher this year on speculation takeovers will increase after Blackstone Group LP agreed to buy Sam Zell's Equity Office Properties Trust for $39 billion in the biggest-ever leveraged buyout.
Bloomberg


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A Well-Versed Turn in Commercial Real Estate
Category: NEWS
By: Pete Kendall, February 13, 2007

Against the emerging prospects for the economy and deflation, we can almost hear Sam Zell belting out the finish to the original version of “Raindrops:” “'Cause I'm never gonna stop the rain by complainin'/Nothin's worryin' me.”
Sociotimes, December 26, 2006

tall towerTaken together the articles at left may well mark the release of “the other shoe” in the real estate market. As we noted with our December 21 and December 26 entries on the great skyscraper boom
and Sam Zell’s decision to cash in his chips by selling Equity Office Properties, respectively, everything is in place for the real estate debacle’s advance into the office market. Now we have the migration of speculative juices to the commercial sector, the massive application of leverage, the belief in the fundamental soundness of the sector and the sudden reticence of Zell against a backdrop of falling prices. Another savvy real estate veteran, Steven Roth, also backed away from the Equity Office deal after initially forcing Blackstone to up its bid. “It is worth taking note when even a bullish Mr Roth, no stranger to skyscrapers, gets an attack of vertigo,” says The Financial Times.

Another factor is the deflation that is already apparent in housing and the commodity markets. Considering how well developed price deflation is in these area and the signs of a slow but steady economic turn covered in recent issues of The Elliott Wave Financial Forecast, investors newfound infatuation with sky-high office space brings to mind dot.com valuations of 1999. In December, we directed readers attention to Sam Zell’s musical assessment of liquidity driven rally in asset prices. The same site offers his analysis of the stock market back in 1999. In a number called The Emperor Has No Clothes, (sung to the strains of Paul Simon’s 50 Ways to Leave Your Lover) the piece wryly notes:
The answer is easy if you think less logically
I'd like to help you all get rich at twenty-three
there must be fifty ways to make a billion.
Pay on the come, son.
As EWFF has noted before, one, usually very late, side effect of the transition from fast-rising to a fast-falling financial assets are satirical portraits of the prevailing mania. Given the extreme, perfectly misplaced level of commitment, these tend to be pretty funny; especially to investors like Sam Zell who exercise uncommon good sense and step out of the path of the oncoming decline.

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