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