Wednesday, July 1, 2009

The Commercial Real Estate Landslide

Disasters are interesting, as evidenced by the success of shows like Destroyed in Seconds (30 minutes of one disaster after another, courtesy of the Discovery channel). A while ago the show aired this video of a landslide in Japan:

The images have stuck with me, and I think there are some strong parallels to what is going on in commercial real estate:

  • First and most obviously, a disaster is going on, and if you’re in its path it’s a very bad thing.
  • As bad as it is for those to be caught in the path, it’s important to realize the whole mountain is not involved. The landslide affects only a portion of the exposed area of the mountain – most of the mountain remains unchanged.
  • The earth in the landslide moves from an unstable position to a stable position.

I was reminded of these facts while visiting with a very experienced real estate investor last weekend. I’m guessing he was in his 70’s, and had some money in a development deal that has a poor prognosis. In this CRE landslide he is going to lose a small portion of his net worth in an unstable deal which was exposed. But, he is confident he will buy other people’s exposed deals at stabilized, lower prices which will recover his losses and more over time.

It’s easy to forget that most CRE is not actively traded, is not fully leveraged, and is owned by people with substantial resources who are looking forward to buying busted deals.