After speaking with Gerard Sweeney, the CEO of Brandywine Realty Trust (NYSE: BDN) (Cramer's Take), a classic commercial real estate operator of office buildings, it is more clear to me than ever that the woes of commercial real estate are directly related to when a property was bought not what it is. In other words, if you bought an office building between 2005 and 2007, you are probably going to default. But if you didn't, and you just own a lot of buildings at decent prices, you are probably just going to make less money than you would have otherwise, as you are losing a tenant here and a tenant there, and it's crimping business.
Plus, according to Sweeney, it has gotten better, not worse, in the last few months, with prospective tenants actually kicking the tires, something that didn't happen for a year. Most important, in his key markets of Pennsylvania, New Jersey and Delaware, business is up nicely year over year. No wonder if you participated in his recent underwriting, you caught almost a double.
Sweeney made it clear that if it weren't for the equity markets, many of real estate investment trusts that had any debt coming due during this period would have not been able to make it. They had no place to go, which means, as he said, the private commercial real estate buyers from 2005 to 2007 are just being left behind. That's the real issue, and the good news there is that the public markets are wide open for those REITs that want to buy from the distressed borrowers, and they can pick and choose to buy whatever they want.
I know that everyone wants to make this commercial real estate issue the next big ticking time bomb, but my issue with that is it is a heck of a lot easier to:
1. repossess; and
2. sell to companies like Brandywine than is residential real estate in Miami or the Inland Empire.
I came away more bullish than I thought I would be. I try to explain it away as knowing that Brandywine is one of those REITs that survived other bad times like 1990, but I also simply believe this problem is contained and will be dealt with without the bloodshed so many anticipate.
Jim Cramer is co-founder and chairman of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer had no positions in the stocks mentioned.
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Reader Comments (Page 1 of 1)
8-20-2009 @ 10:01AM
d Smalls said...
Mr.Cramer since you are the money man, tell me how did
health care become so expensive and what was the first health insurance company to begin Health Care For Profit.
8-20-2009 @ 4:17PM
Jeff Iedge said...
Is this the same Jim Cramer that told us AIG was worthless a few weeks(and $20/share) ago? Or told us to hold onto Bear Stearns? I want a job where I can be more wrong than right and still get paid extremely well.
8-20-2009 @ 5:16PM
Sheldon L said...
Small detail Jeff,
AIG had a reverse split 20:1.
Its up but today's price peg's it at $1.62 per share. Still would be up but not as much as you imply.
Regarding Bear Stearns, They had $17 billion in the bank the day before they fell....tough one.
8-20-2009 @ 10:56PM
jtiedge said...
Good try Sheldon, but Cramer's comments were post split and, with $35B in outstandings, $17B didn't quite cut it. Someone of Cramer's stature might have looked at a balance sheet before a prognostication.
8-21-2009 @ 3:44PM
ccecil said...
JC: I believe you are correct on the strength of the REITs (mostly), but do not overlook the impact of the volume of maturity defaults that is just starting to show its head. It is true that buyers in 2005-2008 overpaid and over leveraged based on ill considered projections. However, there were even more refinancings that took place baced upon the same forward looking projections and these are also all under water. Our re-underwriting of CMBS has lead us to conclude that only 11 issues will not suffer losses to the AJ classes. This represents a tiny fraction of the outstanding CMBS and the overall CRE first mortgage, mezz/preferred. Yes, REITs are well positioned to buy, but will they have continued access to the equity market as their performance deteriorates, their own debt matures (with no refi $ available) and in the kind of environment that will exist with the regional banks being wiped out, major default, foreclosure & Bankruptcy news being the daily diet? We think that the next 18-24 months will be extremely difficult, and a REIT buy at this point should only occur after a thorough in-depth analysis of its holdings, markets and debt.