Although I was in Chicago last week, I did not attend this year's Invest for Kids conference, but after seeing some of the notes posted around the Web, I kind of wish I had.
Sam Zell and Jonathan Gray, head of real estate investing at Blackstone (BX) , exchanged views on real estate, and they were at pretty opposite ends when it comes to investing in real estate today. Gray was relatively optimistic, noting that we are likely to continue to see slow growth and the housing recovery has legs and could continue to move higher for an extended period. He says Blackstone is realistic about the pricing environment, but is looking for opportunities to buy it, fix it and sell it for a gain.
This mirrors what Stephen Schwarzman, Blackstone's CEO, said on the conference call last week. When discussing the firm's investment outlook, he told investors real estate remains an attractive asset class globally. Although there is less distress today, he expects fundamentals to remain solid for the foreseeable future. In most markets, supply remains constrained. Demand for high-quality real estate is strong. Debt levels are not excessive, and bank competition is diminished.
Zell had quite the opposite point of view. He told the conference, "Real estate assets are at an all-time high. Inflation is at all-time lows. The result is not likely to be positive long term for results. More likely to have a recession, a cleansing, a market clearing before U.S. can grow. We can't pretend and extend our way to growth." When asked about more optimistic views expressed by the folks at Blackstone, he quipped, "I'm not as optimistic, but then I use my own money."
I watch commercial real estate (CRE) markets very closely for two reasons. First, I think it is among the very best barometers of economic activity. As an example, if you look at the CRE markets now, they tell you everything you need to know about the U.S. economy. Urban areas with exposure to the financial and technology industries are doing fantastic, with rising rents and high occupancy rates. Second-tier markets that depend on other industries are not doing as well. Suburban markets are struggling a bit. Knowing that, you don't need to read the Fed minutes to find out what is going on in the economy.
The second reason I watch them closely is that I own a lot of real estate-related securities in my portfolio. If I expand that definition to include banks that lend based on real estate values, my exposure to real estate is enormous.
My current view of the real estate markets is somewhere between Zell and the Blackstone people. I think this is a fantastic time to own real estate. Rents are rising, occupancy rates are decent and building activity is not anywhere near bubble levels in most markets. The single-family market continues what I expect to be a very long but slow-paced recovery.
However, it is not that great a time to be buying real estate. I am a deep-value guy, and I like to buy at bargain prices. Right now most properties and real estate securities appear to be fair to mildly overvalued, and some markets like New York, Seattle and Boston are way too richly priced. It is not time to buy or sell, but it is a very good time to sit back and collect the cash flows while waiting for the values to push even higher.
I am always asked what real estate-related securities I would suggest buying if I had Doug Kass' proverbial gun to my head. I am going to give you the same advice I gave my son last night when he asked where he should start putting money now that he is back on his feet. Brookfield Properties (BPY) is a world-class collection of properties across several property types. Take half the money that is burning a hole in your pocket and buy it at current levels. It is pretty well priced as the shares trade at about two-thirds of management's valuation for the units. Put the shares on dividend reinvestment and forget you own them.
With the other half of the money, do the same with Apollo Commercial Real Estate Finance (ARI) . You now have exposure to both debt and equity sides of the real estate markets with best-in-class management. Any time you see financial panic, market collapse or depression in the headlines, buy more. Read the 10k each year to make sure management has not gotten suddenly stupid. If not, just go back to forgetting you own them.
In 20-30 years, send me a nice thank-you note and perhaps a lovely gift basket from your new vacation home purchased with the proceeds