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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Spekulatius who wrote (32881)	11/27/2008 5:53:09 AM
From: Grommit	Respond to of 78748

" I am not that sure that Armageddon will not come. The concern with commercial real estate is that the default of the weaker companies sets up a foreclosure cascade that brings down RE values, similar to what is happening in residential RE." good points. i'll have to consider it... the cause/effect of the current residential housing mkt is falling values (and other issues) cause defaults, and then a cycle. I think you are saying that in commercial, that vacancies would cause value drops, then defaults, then a cycle. but if a debt burdened entity defaulted, some other entity would pick up the pieces and carry on. they do not automatically lower the rent, and the bankrupt stockholders get liquidation value. i am finding huge tangible book values in excess of stock prices -- over 4x for CLP and HRP, for example. I am not sure that covers armageddon, but for that scenario, cash is the only investing option. commercial values only fall when occupancy / rents / and profits fall, not with a liquidity default. so i do not see a cycle of defaults causing more and more value drops. ownership change does not produce a reduction of rent and property value. And residential occupancy rates are not at risk of huge occupancy swings as office property is. People move out of apts all the time and they are replaced as a normal course of business. Maybe at lower rent or other incentives. An economic contraction shrinks apartment demand less than office demand. I believe the debt ratios of these companies provide a cushion. HRP at 1:1, for example, can survive a huge slump. They have $2.9B of debt and $2.9B of equity. They could borrow another $1 billion and be 1.3 debt/equity. One year of rents is only $800 million. They could collect no rents for a year and still pay the dividend. [That's a joke, but theoretically possible.] The point is, they will not be one of the bankrupt entities. who knows? I still have 21% cash and 14% utilities. grommit