Top Fund Manager Sells NYC RE
A: When a realty fund the size of $1.7 billion who has provided annual returns of 40% since September 2002 (CGM Focus Fund has averaged 21% since June 2006) says something about NYC real estate, it's hard not to listen. Kenneth Heebner, co-founder of CGM Focus Fund and manager of the CGM Realty Fund, is known on the street for his very fast and bold swings in equity holdings. When this guy does something, he does it big and he does it fast! So what did he do? Oh, well he only liquidated stakes in NY property owners and apartment REIT's after ringing in a return of 25% so far this year and being named #1 property fund tracked by Bloomberg. Why you ask? Fear of layoffs in financial sector and ultimate ramifications that may have on Manhattan demand for high end residential real estate and commercial office space.
First, the news via Bloomberg:
The $1.7 billion CGM Realty Fund divested SL Green Realty Corp., Manhattan's biggest office landlord, since the end of June, Heebner said today in an interview in Boston.So what you ask? Well if you want to tap into the mind of the way this guy thinks, look at what he did with the homebuilders back in 2005 when the housing market across the nation was still fairly hot:
"You're seeing a retrenchment in the private-equity, hedge-fund and brokerage businesses, and there could be a lot of layoffs," Heebner, 66, said. "That could have a devastating impact on high-end residential real estate in New York. Appetite for office space will also decline."
The fund unloaded shares of apartment REITs Archstone-Smith Trust and AvalonBay Communities Inc. this year. Archstone-Smith, owner of apartments in cities including New York, Washington and San Francisco, is being bought by a group led by Tishman Speyer Properties LP in New York. Alexandria, Virginia-based AvalonBay Communities' biggest apartment rental markets include New York, Seattle, Washington and San Francisco.
"Heebner, who had two-thirds of the real-estate fund in homebuilder stocks at the beginning of 2005, sold his entire stake by the end of that year. Homebuilder shares peaked in July 2005 and have since tumbled an average of 67 percent."This guy is money, plain and simple; check out what the HomeBuilder Index has done and where Heebner sold:
So, is there any real news here other than the adjustment in holdings? While it is a bit concerning that the media is reporting on the move that already happened (we must understand that - the move was probably being liquidated over the past 6 months or so), the reasons for the move are not surprising to me at all. I have discussed so many times here on UrbanDigs my concerns with jobs losses and stated that as one of my serious threats to the Manhattan housing market; both residential and commercial. Forget? Here are the links to my posts on the topic:
Time To Talk Global / Consumer / Jobs
Why Lower Rates Might Not Be Good (discussing jobs at the end of this discussion)
Views/Truths About Subprime & Economy
A Marketplace With Vultures (there is nothing wrong with being a vulture investor!)
Manhattan real estate is very closely tied to wall street and the health of the jobs market associated with wall street. This includes traders of all types, analysts, hedge funds and related positions at these funds, brokerages, brokers, etc..The depth of positions and the size of these salary's in our financial industry is incredible and I don't need to tell you guys the impact it will have should a wave of layoffs occur due to the current credit/liquidity squeeze. This is what Heebner is referring to when he said, "You're seeing a retrenchment in the private-equity, hedge-fund and brokerage businesses, and there could be a lot of layoffs..."
He made this move before the credit mess hit the media so the question now is whether he knew something (which we all know he did) or is aware of how deep this problem really is. We are not as fortunate to have this kind of information. We also really don't know what to expect down the road from all this! That is what scares me. I don't know what firm has what holdings, that were marked to model and may ultimately have to be marked to market when they liquidate! I also don't know what course of action the financial sector will take to protect itself or deal with all this! Do you?
Time will tell if Heebner's call is the right one or whether Manhattan will emerge from this situation relatively unscathed. But one thing is for sure; this bright mind chose to play it safe and ring in profits when too much risk presented itself! These things take time to funnel through the system and while the question on most minds is "how bad is this problem", the better question to ask probably is "when will this problem result in layoffs".
Posted by anonymous
Wed Sep 26th, 2007 02:45 PM
Noah I have to tell you that you change your mind like a daytrader. One day you're saying you're expecting Manhattan's RE market to rise in 6 month and virtually the next day you state you are scared. You did the same switch with interest rates when interest rates were going up you forecasted interest rates to continue to go up. Soon thereafter when interest rates started to come down you forecasted interest rates to go down.
I beleive you have an excellent website but I must tell you I am not a great fan of your predictions but do enjoy reading your articles.
Posted by Noah
Wed Sep 26th, 2007 03:08 PM
anon - First off, let me lay down what I state because I am NOT one too pick a side and stay there for the next 3 years. I do adapt as I see the macro environment unfolding; and the past few months has been crazy to say the least! Anyone who maintains their short-near term stance from June to today, is an idiot. You have to adapt and I am more of a trader than long term investor!
Here we go!
NEXT 6 MONTHS - Manhattan RE will stay strong as inventory trends are very tight. Until inventory reverses course, I will keep my stance on real estate staying strong and prices holding. We are in a sideways pattern now.
NEXT 12 MONTHS - You may see the lagging effects of the depth of the credit squeeze on the overall economy. Add in resets and probably more foreclosures nationwide, and you prob have more problems in secondary mortgage markets. Too much uncertainty SCARES ME because if there is a problem under the scenes, its hard to analyze it.
I said interest rates will rise back on May 17th, and they did big time!
http://www.urbandigs.com/2007/05/jobs_market_strong_rates_headi.html
That was when bond yields were better indicator of rates. Now, with risk being re-priced, its a whole new ball game!
Its a new world. New to me, new to you, new to lenders, etc. Would you feel better if I just say everything will be fine? Prob not.
No worries if you dont like the predictions, Ill still publish my thoughts of the day. I did go on record about tighter lending standards and job losses towards end of 2007 a while ago! I did discuss the credit crunch possibility way before it hit media.
I hate to say this, but I think we are in a general up trend in rates. We may be seeing some easing now due to risks to economy from credit squeeze, but overall, I think inflation is a longer term threat and will bring rates higher in years to come. Just my thinking. At some point, the dollar will rebound and smart money is probably buying at these record low levels. At some point national housing becomes very attractive, when no one else is interested and prices are super depressed.
But Manhattan, this market turns ON A DIME! If I didnt constantly adapt to changing macro environment, this blog would have no substance!
Thanks for comments and hope you keep reading.
PS: Short VNO at 108! Lets see how that works out in 6 months.
Posted by Noah
Wed Sep 26th, 2007 03:13 PM
PS - Back on July 26th, I wrote in this post:
http://www.urbandigs.com/2007/07/mubis_credit_fears_housing_woe.html
"In my opinion, Inventory, Wall Street & Jobs are the most direct fundamentals to the sustained growth of the Manhattan real estate marketplace in this past housing boom! Right now, this is what is supporting us and at the same time these fundamentals are the biggest threats to keep your eyes on! Should wall street flounder, resulting in a loss of jobs and high end salaries then it is very possible that more and more inventory will hit the marketplace at the same time that buyer demand loses a big umph."
Nothing I said today is a contradiction of earlier statements! I just commented on how a trader tries to make his move well before the problem hits!
Posted by SUPPORTER
Wed Sep 26th, 2007 03:28 PM
Noah your blog SUCKS!
Just kidding. Its def one of the more informative sites that merges economics and real estate for new york. I can see why the commenter above saya that, but personally I would rather have you change your mind and post articles when things change, than just stick with what you said in the past no matter what changes in the future.
After all what is the point of listening to someone state the obvious after it already happened?
Posted by Noah
Wed Sep 26th, 2007 03:33 PM
Thanks SUPPORTER - I have no crystal ball. I don't know what may be lurking and pop out of no where. I dont know where rates are headed long term.
But I do my best to discuss threats, changes in macro, relationships one variable has on another, what supports our local market, why its holding up, changes in these support systems, etc..
I am way more interested in macro economics than I am in real estate. Real estate is a distant 2nd, with fantasy football a close third. So my priorities may be a bit out of whack. But its fun to blog, I have to admit.
Im not always right, but hopefully you guys appreciate my thoughts on the topics! Im working very hard to make this site even more useful so that you can draw your own conclusions about NYC real estate in the future. new site launch to come in 1-2 months.
Posted by agreed with anon
Wed Sep 26th, 2007 03:36 PM
What #1 is saying is how could you on video interview state that Manhattan real estate will be strong in 6 months, and then today state you are scared upon hearing the news that this fund manager sold their stocks in NY real estate related companies? There is a point there you have to admit
Posted by Noah
Wed Sep 26th, 2007 03:47 PM
Let me explain with an analogy first. The recent credit squeeze was a result of an environment of falling home prices, rising defulats/foreclosures, rising rates, bad bets by wall streeters, too much leverage, and complicated derivaties that many didnt understand risks to all meshed together.
There were those that KNEW of these issues a long time ago, but it only came to a head in late July! Why is that if it was all there before? What took so long? My point is that it takes one thing, a catalyst, to make something like this headline news; and we NEVER know what that spark will end up being!!
On the video, I stated that Manhattan real estate over next 6 months looks strong to me because inventory is very tight and has declined over 30% in the past year. Its a near term outlook. Inventory doesnt turn overnight, but buyer psychology can which effects sales volume.
Longer term, it may take another 12+ months until what we know today, comes to a head and results in job losses on wall street, thereby hitting NYC real estate. It may not! Who knows. But what I don't know, is what scares me. Uncertainty. For now, fundamentals are in tact and near term health of prices here seem fine! So my prediction for 6 months down the road is still ok. When I see things change, Ill report it.
Longer term, I worry that ultimately $80+ oil will have an effect, it doesnt now and the price is there, but I think it will at some point. I worry about inflation globally. When Greenspan kept fed funds rate at 1% for so long, there were those that said it would lead to problems! But that took 4 years to take effect and now everyone blames Greenspan for current mess in credit markets/housing! No good times last forever, that is all I know. markets are cyclical and timing them is very difficult. So I get out when I think risks outweigh rewards; which is why I sold my real estate here in manhattan last July! perhaps a little too early. But fine by me!
Posted by anonymous
Wed Sep 26th, 2007 05:18 PM
Post# 1 here again.
Noah, clearly a few days ago you stated on the video the housing market will be strong in the next six months and you gave your reasons why. Now a few days later you open some paper or journal and read that a fund manager dumped a lot of real estate holdings and now your scared. If you read that another well respected real estate investor acquired a large holding in Manhattan tomorrow you would probably forecast the market to be strong again.
If tomorrow the Dow jumps 400 points will you change your outlook. I think so and I also think that if the dow fell 500 pts two days later you would also change your view point on the RE market I realize the Manhattan RE market is fluid but doing day trade forecasts on the Manhattan RE market may have an effect on your credibility.
Here's an excerpt from an article to chew on so maybe after reading it you will be less scared
"Lehman's results seemed to bode well for thousands of employees who are trying to calibrate year-end bonuses. Those bonuses, which provide the bulk of a trader or banker's compensation, strongly influence everything from Manhattan real estate prices to global art values.
Though bonus decisions are made in the fourth quarter, the bank accrues, or sets aside, a portion of revenue every quarter, so each period offers a critical data point. This quarter, Lehman set aside $2.1 billion, compared with $2.7 billion in the second quarter.
For the nine months ended in August, Lehman has set aside $7.3 billion, 14 percent more than the $6.4 billion set aside in the 2006 period. Lehman had 28,783 employees at the end of the third quarter, 16 percent more "
Posted by Noah
Wed Sep 26th, 2007 05:41 PM
Hey again - In the video I stated that I do not expect the bonus season to be nearly as bad as some economists think! The reason is I have many contacts in the financial / hedge fund world that I keep constant connections with.
Its not like I read 1 article, or listen to 1 interview on CNBC and change my whole thinking.
I dont know why this is so hard for you to understand when I state the red flags and what Im worried about is:
1. Uncertainty about depth of credit mess / what is yet to come out?
2. Longer term inflation / High energy/commodities prices
3. Job losses from housing slump that are yet to hit
4. Hit on consumer spending from housing slump
5. Weak US dollar as inflationary
I do not think today's post effects my credibility at ALL! Especially after all i have discussed since AUG of 2005 here on the site! If you do, then fine, but today's post was to expose what Heebner did and to re-iterate my worry/concerns about uncertainty of the credit squeeze. Thats all. Its just a concern. Fundamentals are still in tact and as long as that remains, real estate in Manhattan will hold.
Are you saying I can't be short term bullish and medium-long term concerned? If thats your argument, then YES you got me! I am a bit concerned that there will be a LAGGING effect from this credit squeeze on economy and financial sector that could eventually hurt affordability/buyer pool here in Manhattan. But that concern is longer than 6 months away and will take time to prove true.
Posted by anonymous
Wed Sep 26th, 2007 07:12 PM
Well Noah, Post #1 again:
All I have to say is that I find your articles interesting, informative and enjoyable reading. I do find your short term and mid range forecasts entertaining..
Posted by Noah
Wed Sep 26th, 2007 07:15 PM
many thanks! Wish it was a bit more than entertainment though. If not, still ok by me!
Keep in touch!
Posted by Michael
Wed Sep 26th, 2007 08:15 PM
I also love this site and am appreciative of your work on it.....you mentioned above that manhattan real estate can "turn on a dime"....do you really feel that nyc real estate can change that quickly?
Posted by Noah
Wed Sep 26th, 2007 08:29 PM
Michael - YES! Thats the crazy thing about this market. It is amazingly different from most other markets, but tied too closely to wall street.
So I ask you this. Can wall street turn on a dime? Can we be at 12,000 on the DOW in 1 month's time? The answer is YES, and its always something that no sees coming that gets you. Maybe you worry about it, but you didnt think it will hit that fast.
If stock market turns on a dime, the psychological effect alone will contribute to real estate turning that quickly as well.
michael, look at the stock market and how well its done to see why we held so strong. Its no surprise that we held up so well and took advantage of currency trends at same time to add to our buyer pool. Things change. Not to scare you, but keep eyes open; mine are!
Posted by michael
Wed Sep 26th, 2007 08:51 PM
I still think that even if the stock market tanks, people get laid off, etc etc...it would not effect real estate overnight...i think sellers will be in shock and start lowering prices probably 6 to 12 months after the stocks tanking....just my opinion......
Posted by YR
Wed Sep 26th, 2007 09:12 PM
No where in the post do I see, Noah stating that he is running scared of the NYC real estate market. He presents the facts and then mentions that time will tell if the decision made by this portfolio manager is correct. I think Noah presenting this information is very important, since each reader can make up his/her mind regarding the state of the NYC market.
Like someone mentioned earlier, I'm glad this isn't a blog which only shows one side of the equation. Alot of financial bloggers are so set on their one view, they fail to show any other consideration to the opposing point of view. Thus any contradictory news, is always met with spin.
I'm glad Noah, isn't one of those type bloggers.
Posted by Noah
Wed Sep 26th, 2007 09:35 PM
Michael - VERY POSSIBLE! Ill buy into that possibility.
thanks YR!
Posted by jake
Wed Sep 26th, 2007 10:37 PM
Noah,
Your blog is informative and great, but I can appreciate the first commenter's take
My problem is that with so few voices talking about the local market, so few who actually back up their thoughts with facts and reasoning, your qualified predictions are a little frustrating. Maybe if there was more local voices, and data that made sense with the nationwide picture...
anyway, thanks for all the hard work
jake
Posted by Noah
Wed Sep 26th, 2007 10:42 PM
Jake - ideas in mind? what would you like to see, #1 commenter too!
1. More bloggers with different perspectives on this site?
2. A weekly debate on current events?
3. More open discussion forum?
4. Other ideas?
I've been working on data part of 6 months! Hopefully it will be up in few months for you guys!
Posted by Doug Heddings
Thu Sep 27th, 2007 12:11 PM
Hey Noah,
Doug here. I'm empathetic to your situation here and completely appreciate all perspectives (yours and commenters). It's difficult for those of us who are so deeply entrenched in our real estate market to not be affected by big stories like this one.
Having said that, I respectfully disagree that the Manhattan real estate market can or will turn on a dime. As someone who has made my living in this industry for 16 years (and 1992 was an AWFUL year to start selling real estate), my experience has been that the housing mark lags other markets, particularly Wall Street. I also don't believe that Wall Street is as big (still big but not as big) an indicator of housing performance as it was in the late 80's and early 90's. There is a lot of wealth in this city that has very little to do with Wall Street. I still can't wait to see what bonuses are going to look like and it does appear that they won't be as bad as expected even 2-3 weeks ago. My friends on the Street have calmed down a bit but a couple of weeks ago they early had me convinced that they were all getting fired.
Again, I appreciate shifting views as I often do the same thing based on what I see in both my daily business practices and "reliable" media sources. Kudos to you for always putting your thoughts and opinions out there. You are also one of the few who takes a very analytical approach with your viewpoints which I really appreciate. Those of us with strong opinions (which of course can change over time) expose ourselves to being incorrect (oh no...we can be wrong!)
I think what is most important to highlight is that you (Noah) always come from a place of integrity and sophistication that has your readers best interests in mind. What more can we ask for?
Posted by Noah
Thu Sep 27th, 2007 02:51 PM
Doug - your opinions are ALWAYS respected! Thanks for the kind words and kudos to you as well for doing a fantastic job at truegotham.com and finding your niche in writing about your experiences, problems with this industry, and tips to your fellow readers and clients.
I can only hope to become half as successful at this game as you have already done!
Posted by Nadiya Bhat
Sat Sep 29th, 2007 11:37 PM
Hi Noah,
One of my friends who was in the market for about a $2M place sent me the article from bloomberg.net on 9/25, with a comment about how it was probably better that he didn't buy.
After freaking out for a a few minutes and second-guessing whether I made a mistake in buying my junior 1BR in Gramercy, I did a little rethink.
My response to him was as follows:
"I'm thinking about it - the properties he unloaded were REITs - usually commercial (office rental) or luxury rental (Avalon and home builders). I think the market will correct for higher-end items more. I can't believe that wall street profits/firings will affect the coop. market much (in the short-term) given how anal some of cooperatives are in terms of having a few years worth of mort+interest payments in liquid assets. It may actually decrease the price gap between coop and condos? There'll be fewer buyers for a few years? It will probably have more affect on all the new condo inventory that became available over the last few years where people have taken speculative bets, condos which have had laxer rules on buyers.
But if you're right, and the downward trend is overall and in spite of tight inventory, then the real estate market is not the problem. The whole economic situation would be ominous.
But it's probably a good thing that you didn't buy in any case."
Maybe I'm being too optimistic and hopeful that my starter apartment is not on the high-end and hence not affected. But as I look at the Gramercy, and the (West and Central) Village markets, with some coops requiring 40%-50% down and requiring that the rest be available in liquid assets, and these properties still being sold over the last year, it's hard to imagine it all falling down because of a bad year at Wall Street.
So I'm hoping that the coop market in the city stays steady with those often maligned coop rules ensuring that buyers can afford to buy. As for the condo's - I know they're more desirable, but have laxer rules. So that's where I see it hitting - especially with a lot of inventory available or coming available in Chelsea and Gramercy areas. I'm not much of an economist, so I hope that my thoughts are not too naive.
By the way, love your site - used it as a resource to put my board package together.