Posted On November 2, 2011 |
The macro economic picture is ugly. Unemployment is stubbornly stuck at 9% nationwide, and even New York is up at 8%. Our country’s GDP is showing meager growth of 2% which isn’t really enough to keep up with our population growth; at this pace the 8 million jobs that we lost during the recession will take nearly a decade to replace. Home values are still in the doldrums, with some markets showing further declines as banks have now re-tooled their foreclosure process to facilitate a faster process. The U.S. consumer is still in lockdown and going through the painful process of deleveraging their balance sheet without a giant ATM masquerading as a McMansion. Our government is attempting to deleverage our nation as well, which will trigger vast socioeconomic repercussions.
With all of this deleveraging taking place, we continue to see opportunities in the severely dislocated real estate debt markets. There will be over $1 trillion of real estate loans coming due over the next few years. Lending capacity is far below what it would take to refinance these loans and there are still many banks that will be selling loans at a discount to par value over the next few years. We continue to focus on the debt portion of the capital stack to find value and protect our downside. We have been successful in buying and originating debt which has generated equity like returns with the safety of debt. Given the on-going economic and political mess in the U.S. and abroad, we tend to think that it remains a good time to invest in the safest portion of the capital stack to take advantage of the value arbitrage that exists due to the dynamic political and economic landscape.