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Wednesday, July 27, 2011

Weighing Commercial Real Estate

By Michael Fonda (Chicago)

Hugh Williams, my partner at Avison Young, suggested that I read the latest biography of Warren Buffett, The Snowball: Warren Buffett on the Business of Life by Alice Schroeder. In the book, Schroeder writes about a favorite adage of Buffett. "In the short run the market is a voting machine but in the long run it is a weighing machine."

Reading the Wall Street Journal's Property Report this morning, I came across the following article: Lehman Cranks Up Sales as Prices Rise. This news story aptly illustrates Buffett's adage. As I discovered by reading Money and Power: How Goldman Sachs Came to Rule the World by William Cohan, in February of 2007 Goldman marked their mortgage securities at 98; in March of 2007, those same securities were marked at 55. This drastic change in Goldman's marks destroyed the value of the real estate securities market and triggered the calamity that followed. Goldman had the cash (the votes) and their investment banking competitors, like Lehman, didn't.

Fast forward to 2011. Lehman Brothers Holdings has agreed to sell a portfolio of 10 office buildings in Rosslyn, Virginia to a real estate fund of Goldman for approximately the same price that Lehman paid for the portfolio in 2007. As Buffett might conclude, the asset weighs the same in 2011 as it did in 2007.

It's a shame. All this pain and, four years later, the value of real estate remains the same.

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