Real Estate
Half full or half empty?
It all depends on how you look at the glass
Smart Business Miami | May 2008
Kevin Markwordt
Managing Director
Investment Services Group
Transwestern
It seems like the biggest news throughout the last six months has been the
so-called debt crisis. You can’t help but hear about it on TV and radio news
programs, with the pundits using words
like “real estate collapse” and our government threatening to legislate the way
out. But if you listen carefully, you may
realize you’ve heard all this before.
Think back to the spring of 2000. Up
until then, we’d been enjoying several
years of unprecedented growth, highlighted by the technology sectors. Then
the dot-com bubble burst and, suddenly,
we were in the middle of a real estate
slowdown. In about six months, things
went from good to bad. Because of economic uncertainties, decisions came to a
halt, payments were missed, employees
were laid off and vacant space grew.
“Just like the technology boom in the
late 1990s, over the past five years or so,
our real estate markets across the country were seeing incredible growth,” says
Kevin Markwordt, Managing Director of
the Investment Services Group with
Transwestern. “Values for properties of
all types were appreciating at rates comparable to a dot-com IPO not so long
ago. Profits from real estate investments
were outperforming Wall Street.”
Smart Business learned more from
Markwordt about the real estate “crisis.”
What caused the initial real estate boom?
Wall Street isn’t made up of stupid people. They saw what appeared to be the
next big thing and figured out a way to
package and sell it; in this case, through
mortgage-backed securities. This investment vehicle wasn’t new, but the seemingly unstoppable rise in real estate values made mortgages, particularly home
mortgages, a great way to pull in investors who wanted superior returns.
Here’s how it worked: Mortgages made
on properties were pooled into a group
of about 150 to 200, typically in a diverse
assortment of types and locations. These
loans were then sold at auction to Wall
Street investors, and a financial firm in
the U.S. or abroad would purchase many
of these groups in bulk.
But just like the technology boom, a
real estate bubble was in the making.
Capitalization rates were being pushed
down, sometimes artificially. Rising construction costs were ignored. Demand
for real estate, an investment vehicle formerly requiring deep pockets and a
healthy appetite for risk, was now available to small investors, and demand for
investments that made economic sense
quickly outstripped supply.
By the nature of mortgage-backed
securities, it was hard to determine the
risk of a group of wildly different properties, with the original loan signed for
by individuals. As these mortgage loans
became riskier and riskier — either with
poor locations for the property or with
shaky ownership on the loan document
— the financial institutions who had purchased them in bulk began to realize
they had no idea what the true value of
their holdings were.
How is today’s crisis different?
Today, the economy and U.S. real
estate markets seem to be locked into a ‘wait and see’ mentality. There’s no panic
but lots of caution. This is because, for
the most part, but especially when it
comes to commercial real estate, market
fundamentals remain strong and, quite
frankly, there simply aren’t better investment vehicles than real estate out there
now. Most institutional investors are
willing to hold onto their assets, ride out
a drop in value, and then see what the
future brings.
But, just like the last boom and bust,
there are opportunities out there. After
the tech bubble imploded, savvy
investors, who understood that investment business, were able to analyze the
wreckage and pick up some real gems at
bargain prices. The same thing is going
to happen in real estate for those that
understand the markets and product
types.
So is this a good time to invest?
It’s not a time for the inexperienced
investor to chase perceived deals —
these folks are likely just going to be
burned again. But for those willing to
take the risks, especially those who take
the advice of an experienced real estate
investment expert, there will be opportunities and rewards.
Some evidence indicates that the real
estate markets and the economy has
already started to slow down On the
other hand, do these indicators tell the
whole story or is the market just taking a
well-deserved breather? For example,
retail sales, never that strong in the first
quarter, slipped only 1 percent in February. The national unemployment rate
remains less than 5 percent and in many
areas is even lower. Compare where the
economy stands today to the 30-year
average, and suddenly, the picture is
much rosier.
So is the glass half full or half empty? It
all depends on your angle.
KEVIN MARKWORDT is Managing Director of the Investment Services Group at Transwestern. Reach him at (404) 842-6508 or
kevin.markwordt@transwestern.com.
