Monday, March 23, 2009

GS: 2009 Outlook: Bearish On CRE; REITs Could Re-test Recent Lows

Goldman has been really pounding the REIT space. Which, of course, skeptics will say simply means their prop desk (or what is left of it) is buying REIT assets hand over fist. Or maybe they just really hate the space. Either way, the main concern GS has is the massive overhang of upcoming debt maturities (through 2011), and if the recent financing by SPG is any indication of what kinds of costs of capital REITs can expect, it will get ugly fast. Furthermore, GS believes charge-offs are set to skyrocket over the next several years.

Additionally, GS is expecting a dramatic rise in cap rates: in the neighborhood of up to 500 bps:

The core of the problem for REITs and the entire CRE space in general is the rate of vacancy increases across different sectors. This one would be a doozy for the government to "intervene" in unless it decided to spill its employees out of DC and have them populate New York's midtown, all the while paying peak-market, 2005 rents.

Lastly, Zero Hedge's approach at REIT scatter-bubble charting seems to have found fans. An moving chart from Goldman evaluating a whole lot of three-axial data.

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Anonymous said...

Great stuff, i was just putting together a REIT piece for my clients but GS beat me to it re cap rates. In the 1990s cap rates rose to the 9-10% rate in certain areas yet sellside is still using 6-7% cap rates for NAV calcs.