The medieval knights of Europe wreaked havoc on the Levant’s kingdom of heaven in their quest for the holy grail. The leveraged gunslingers of Wall Street wreak havoc in currencies and countries at the speed of light in their quest for alpha. The hoof beats of the smart money herds often take me to places where I find Santa, since he never came to visit me because Karachi and Dubai do not have a white Christmas. The closest I came to Santa‘s lair on the North Pole was a due diligence visit to a mobile phone start-up in northern Finland just below the Arctic Circle. My Finnish host offered me reindeer steak but my love for red nosed Rudolph was so great that I declined and opted for a vegan dinner.
The smart money herds convinced me that a serious pot of gold is waiting for those who chase Santa across the bombed out $1 trillion US commercial real estate (CRE) industry on Wall Street. CRE has faced three macro financial neutron bombs in the past three years.
One, the COVID pandemic triggered a black swan economic shock and social trends like hybrid work/telecommuting that devastated the segment. Once a trophy niche for the gulf sovereign wealth fund in cities like NYC. Manhattan’s office vacancy rate is now 16%, the highest I have seen in my life and office REITs that focus on the Big Apple are down 70% from their highs in the pre-pandemic Stone Age. The pandemic also led to epic migrations from the East Coast high tax, yuppy wasteland to the Sunbelt cities like Tampa, Dallas/FW, Phoenix and Austin, where villa (sorry Tiberius. This is what we call poky little single-family homes in Dubai and they look nothing like your magnificent villa on the Isle of Capri!) prices rose to 30% to 40%. Bob Marley taught me that there is money to be made for Rasta-Matt in Exodus, the movement of the people.
Two, the Powell Fed engineered the swiftest, most draconian hike in interest rates in the last forty years when it abandoned free money at the March 2022 FOMC conclave. This brutal rise in interest rates means cap rates for publicly traded REITs have surged almost 300 basis points while their valuation metrics are on FFO are a mere 52% of the S&P500’s 20X P/E. The divergent spread between private value and public value is now so great in many areas of CRE that making money is as easy as snatching candy from the hands of a 4-year-old. Something I do not recommend.
Three, we are in the embryonic stages of a systemic banking and sovereign debt meltdown, no matter what the perma-bull cheer leaders of Wall Street and the Goebbelsian propaganda ministries of the world and their corporate media mouthpieces assert. Thousands of banks are de facto bankrupt because they are borrowing money at 6% and have invested in long duration bonds at 2 to 3%. The China property sector is a $5 trillion black hole and condemns the Dragon Empire to the mother of all balance sheet recessions, akin to Japan’s two “lost decades” since 1990. In Europe, I see German real estate stocks and British landlords trading at a 50% discount to NAV. In many countries, the flow of banking credits to property developers and construction companies is going to collapse. This is the time to go big game hunting for 20 cents to the dollar real estate and not succumb to obscenely priced broker rigged hara-kiri markets that will gut your net worth and self-worth.
A safe equity lollipop for widows and orphans? CBRE is the world’s largest corporate CRE services and leasing firm. It trades at 13 times forward earnings when its val metrics in the pre-Covid era were 17 to 18X. Corporate CRE outsourcing is a global mega trend and CBRE is Ground Zero. The management team is world class. CBRE could easily earn $8 a share in 2025 if its deal team uses the current tempest to acquire peers worldwide. I’d love to buy a Bentley at the price of a Nissan Tiida. CBRE is thus a double bagger for me in this cycle if it regains its 18X val, which it will.
This article was originally published on LinkedIn and is republished here with permission.
