Monday, June 30, 2008

Point of Capitulation?

We've been wondering for a while if commercial real estate, and the economy in general for that matter, is close to a 'point of capitulation' at which buyers and sellers will get tired of the standoff, adjust prices to close deals, and transaction volume will start to rise. From our vantage point as financial intermediaries and principal investors it seems that most buyers are still factoring a lot of downside risk into their offers and sellers are still having a hard time believing that their property values have really decreased. At the same time lenders, always conservative even in good times, are assuming the worst when valuing many properties. At some point it seems that someone or everyone will have to give a little and hopefully a snowball effect will be achieved.

We're still not sure when we'll reach this point of capitulation or what the 'last straw' will be, but this interview with Hugh Kelly makes a good point by reminding us that real estate investors are at base always buying future cash flows, and those likely haven't been impacted as severely over the long term as the market stalemate would lead us to believe. He also makes a great point that there's plenty of capital in the wings just waiting for a few signs of stability and rationality to return to the market before swooping in.

Another encouraging article is this one from CBS Marketwatch way back in 2002 pointing out that at that time investors saw a Dow Jones at 7,000 as the point of capitulation. It's encouraging that this time around the Dow looks like it should capitulate at a much higher value, and real estate values, even down 10-20%, will still be up significantly when viewed over a 5+ year time horizon.

Any ideas on when capitulation will be reached?

Llenrock Group

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