I’m of mixed mind on this topic.
The “value” of a piece of property for lending and/or market purposes is nominally determined by a professional appraisal, which is done on three differing methodologies. 1: Replacement 2: Comparables 3: Cap rate.
Under the “replacement” method I consider a piece of developed RE to consist of 5 broad components: 1: the land. 2: the raw materials req’d to build the structure 3: the general labor 4: the supervisory load & the permitting process; 5: The carrying cost of the loan/opportunity cost of the down pmt during the construction thru permanent financing phase.
If you were to compare the sum of all those elements between say 2004 and now, you would find that land values declined reasonably dramatically, raw mat’ls declined a fair amount, general labor declined, 4: permitting stayed about the same, and carrying costs (for CONST) loan probably skyed. So, one would have to assign a percentage-of-total to each of the 5 general parts and degrade or upgrade them accordingly. As land is typically in the 30% range and materials are in maybe the 20-25% range, replacment costs are probably down by maybe 20%.
As for comparables, those are obviously whacked.
Cap rate calcs have a lot of starangeness in them, as loans may require MUCH more downpayment, rents are decreased for many commercial tenants, and there is a much larger window for rent default.
Current marks reflect seriously reduced demand for the final product, increased difficulty in financing same, a general loss of marketability for the debt, uncertainty as to the ultimate value of the collateral, and worsening cashflow from rents. Anything good about this picture except “we hope it will get better”?
The fact of the matter is that when giant corporations such as FNM, FRE, GM, F, AIG are being vaporized in mere minutes; ratings agys such as Moody’s, Fitch, and S&P have demonstrated either/both collusion to prop asset values or flat out negligence, giant banks such as Citi and corps such as GE have had to pay 600 or more basis points over LIBOR or Fed funds, the market has every reason to regard
current conditions as “dodgy” in every respect. Let’s not forget the Fed’s willingness to invent preferred stock and jam it in ahead of what we might own as a matter of course in its’ unpredictable and ad hoc machinations.
Now, many suggest that these entities have just been snarked and that the markets will come back of their own accord. Maybe. All of them? How’d that happen? We are already giving these cos gargantuan benefit of the doubt via bailouts. Now we’d further like to pretend their futures are rosy because they’re being run by skiled folks....who DIDN’T see this situation coming....whose execs have universally grabbed as much as they can on their way(s) out the door...and it isn’t enough...?
Play any accounting games you want. The market is telling the truth about these pigs and the value(s) of their assets A HELL OF A LOT MORE than the folks who claimed the crisis was “contained”, that FNM/FRE/LEH were “adequately capitalized”, that the $700 billion in the first bailout would be used to buy “toxic mortgages” and seventeen other pieces of bulls**t that have been flung at the US taxpayer, who’s ultimately on the hook for all this Fed/Tsy/congressional largesse.
Long ago and far away, many were screaming that the lack of transparency in debt tranching and derivatives would lead to this situation; that the opacity so pumpalicious on the way up would bite like a rabid dog on the way down. Apparently, there is still no widespread desire to listen to the adults in the room.
Nailed it!!!