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Moody’s and Green St have each recently released studies purporting to show where values are. Moody’s says still low, while Green St says way up. Neither makes any sense. First, there is no real way to know what anything is worth now since there are so few trades they do not constitute a market comp. Second, many are distress deals or are bid auctions where too much money is chasing too few deals so the supply/demand factors are completely skewed and the result meaningless for the broad base of assets. Third, REITs are the main buyers, and based on specific deals I have seen, they are way over paying just because they need to spend all that capital they just raised, and their cost of capital is well below the ordinary real estate buyer capital cost today. Fourth, with interest rates at virtual zero and inflation at maybe 1%, there is a complete distortion of cap rates. Fifth, leverage is generally unavailable for the average deal so just because a major buyer of a New York building got cheap debt is no indicator of the debt markets for the average investor. Sixth, most notable deals are taking place on the coasts in major cities. There is a complete bifurcation between those deals and the rest of the country. It is as though there are two different countries-New York, DC, and a few other cities, and then that other country west of the Hudson River. Deals for Shorenstein trophy office buildings in Manhattan have nothing to do with selling a 100,000 sq ft retail center in Tulsa.

Moody’s claims they track everything over $2.5 million. That means they track all the very distressed sales as well as others. There is no weighting of each and no real way to sort the data to see what is a true sale vs a lender or pressured owner dumping an asset. It is likely that Moody’s data is biased to the negative and it is very clear Green Street is heavily biased to the upside and just as unrealistic. Green Street talks to a lot of REITs and brokers. Neither is a realistic source of data that means anything for the rest of the owners and investors.

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