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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: lurqer who wrote (70355)	2/24/2001 2:36:23 PM
From: A.L. Reagan	Read Replies (3) \| Respond to of 99985

I'll reiterate that No. Cal. looks OK. Equity Office is controlled by Sam Zell. It would be extraordinary if Sam "the Grave Dancer" significantly overpaid for the Spieker portfolio. Betting against Zell historically is a low-return endeavor. <g> Indeed, the fact that Spieker sold at a good price is evidence that the market on the whole is healthy. When you look at the shrinking rents in some of the S.F. submarkets heavily influenced by dot.coms, I think it bears consideration that these were older existing buildings in the ring around downtown (albeit remodeled), where rents shot up on short-term supply and demand; not massive new construction with attendent borrowing that indicates a gross misallocation of capital (the thing from which bursting bubbles are made). In most cases, the creditworthiness of dotcoms and other stat-ups were suspect by the real estate and lending communities, and the tenants ended up posting very large security deposits and/or L. of C.'s, and/or paid for most of the remodeling costs themselves. Back in Austin I did a deal all the way back in early 1998 with a venture-funded startup, where the tenant posted cash security equal to six months rent plus paid half the cost of finish out. They actually went bust-out about six months ago, and I offered to repo the space on a "walk-away" basis, which they declined. Instead, they utilized their investment in FF&E and leaseholds to go into the shorter-term incubation sublease business (a new fool is born every minute) and have paid the rent each month since. Here's a little chart showing how the REITs have been doing recently (you guys will note the double top and current modest declines, which certainly play into the slowdown scenario, but sure as hell doesn't look like the NDX bubble). The November/December run-up is primarily attributed to prospect of lower interest rates, to which commercial R.E. is particulary sensitive. siliconinvestor.com Home prices in the Bay area, which have been absurd for years, are another thing altogether, and I suppose that whatever institutions are actually holding some of this paper may have some vulnerability. I'd also look at some of the sub-prime home equity specialists for problems. Please don't misunderstand lurqer, I'm not saying that commercial real estate is bulletproof in a recession (tenants will after all restructure and in worse case go bankrupt), just that if folks are looking in this area for the next macroeconomic bubble to burst, it ain't there from what I see. Obviously there will be geographic and sector area weaknesses (retail properties tend to get hit first), but we just haven't had the nationwide leveraged overbuilding required for a major collapse.