Rational and Irrational Exuberance in Property Markets

This morning’s Barron’s references Randy Zisler, who runs a RE investment fund out of his office Zisler Capital Associates in Marina del Rey, California.

Zisler has been a real estate investor for some time, and correctly called the top in RE in 2006. His firm recently put out a report entitled “What Causes Bubbles and Crashes, and What Can We Do to Prevent Them?

The short answer to the first question is excessive and imprudent leverage. Three years into the RE collapse, the deleveraging process has destroyed the credit bubble fed rise in equity. Zisler notes that “Most leveraged equity invested in real estate from 2005 has evaporated, as property prices, if marked to market, have fallen 30% to 50%.” He expects a further decline in CRE property values next year (office, retail and industrial), but envisions an upturn in 2011.

That’s the good news; The bad news is a “massive repricing of all commercial real estate;” Zisler warns of a “crisis of unprecedented proportions”approaching:

“Of the $3 trillion of outstanding mortgage debt, Randy points out, $1.4 trillion is slated to mature in four years, and he estimates another $500 billion to $750 billion of defaults. Maturing debt will have a tough time finding lenders. Debt that has been or will be marked to market, he predicts, will render many banks, especially of the regional and community kind, insolvent, since much of the debt is worth half or even less of par value.”

Zisler’s Slide Show was included in the California State Controller’s Office report on the state’s finances; You can download it at their site; more of Zisler research can be found at their own website.

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Sources:
Bubble Slide Show from the ULI Presentation
Zisler Capital, 11/9/2007
2009 Research
http://zislercapital.com/research.asp

Mind the Gap
ALAN ABELSON
Barron’s NOVEMBER 16, 2009
http://online.barrons.com/article/SB125815697982347765.html

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