Big Real Estate Player: 'I'm Getting Out'
Forbes Magazine had this profile of a real estate mogul. "The world's best real estate investor has made billions in the U.S. market. Now he's cashing out and buying overseas. "'I feel totally safe playing polo on a field full of pros,' says Tom Barrack. 'But when amateurs are all over the field, someone can get killed. They have more guts than brains.'"
"They charge after every ball and don't know when to hold back.' It's the same with the U.S. real estate market right now: 'There's too much money chasing too few good deals, with too much debt and too few brains.' The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them. Says Barrack: 'That's why I'm getting out.'"
"Today Barrack sees signs of the tech bubble mentality in the U.S. real estate market. Too much capital is chasing real estate, he complains, with hedge funds, private-equity groups, and rich investors all bidding up the same properties. 'They've driven prices to the point where the yields on high-quality properties are like the returns on bonds, around 5% or 6%,' says Barrack. 'That's too low.'"
"And he sees the bubble deflating soon. Barrack thinks the catalyst will be a trend that few others are talking about, a steep rise in the price of building materials and labor. 'Construction costs have spiked 30% in the past nine months,' he says."
"The slump will show up first in speculative hot spots like Miami and Las Vegas, he says, where condo developers are preselling their projects for what look like big profits. When they actually build the units over the next year or two, he predicts, they will end up spending more than the units are now selling for. At that point, says Barrack, the developers will try to raise prices."
"'But most of these buyers are speculators,' he says. 'They will either sue the developers to get the original prices or get their deposits back and walk away.' The developers will then put the units back on the market, and the glut of vacant condos will drive prices down. 'It's the busted deals caused by construction costs that will cause a turn in the market,' he predicts."
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