I spoke to a really interesting investor this morning, John Jacquemin. He is president and CEO of Mooring Financial Corp, a Virginia-based private investment house, and he is actually making money in commercial real estate, while everyone else is losing their shirts. I thought I’d post some of the excerpts that never made it on TV:
We anticipated a weakness in late 2006, so we were shorting commercial real estate and particularly we were shorting the CMBX, which is a credit derivative index on commercial mortgage backed securities.
Jacquemin admits he was slightly early and lost money at first, but he kept to his prognostications, which are now paying off big.
We thought the economy would grow weaker, rents would come down, occupancy would come down. We thought investors would demand a higher cap rate, which now they are, because they weren’t factoring in the true risk in these investments. We thought the lenders would get wise and would demand a higher rate, which more reflected the risk of these transactions, and we thought that lenders would also require more equity. All of those things have happened or are in the process of happening.
We are still holding our positions because we don’t think we have seen the worst. We think that that there is an oversupply, and unlike the late 80’s early 90’s when we had true overbuilding, especially in offices, this time around my friends in commercial real estate have said we are not going to see a lot of trouble because we haven’t seen the kind of overbuilding back in the late 80’s. Now that is true in a sense, but in a sense it’s not, because …we built malls, stores, restaurants, hotels, to meet a level of GDP that was unsustainable, a level of consumer spending that was unsustainable, the consumer was saving nothing, basically.
Of course now the savings rate is up to around 3 percent and Jacquemin thinks it will go as high as 5 or 10 percent. That means GDP stays low, and the need for all that retail and service real estate stays low as well.
We are over hoteled, over retailed, were over resorted, we are over restauranted, and we think that trend will continue for another year or two. 28 11 so we are going to see more vacancies all across the sector and not just where the consumer actually purchases but also in warehouses and manufacturing plants because they were geared up to supply the goods that the consumer was buying by not saving and even by borrowing. 28 32 and the consumer hit record levels of debt, never before seen in history, so not only are they not saving, he was borrowing to spend.
So Jacquemin is holding his positions in the CMBX and short positions in REITS and adding short positions in smaller, regional banks, which have heavy exposure to commercial real estate. He thinks they’re vulnerable. He’s also short the KBW regional bank index, which has about 50 names on it.
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