While technical indicators are used frequently to analyze stock investments, it is a technique seldom (if ever) used in commercial real estate. When Marketwi.se used it to analyze Cap Rate to Treasury spreads, it turned the conversation on its ear.
We were fascinated by this approach and include their chart below for your viewing pleasure:
Source: Marketwi.se
In every debate on commercial property values, it never fails that someone will chime in with some over used real estate cliche like “all real estate is local” or “location, location, location”. But when someone executes this level of analysis, it deems a thoughtful response.
That said, our initial reaction was more theoretical than analytical. A moving average is an indicator primarily used in technical analysis . And, during the bubble, technical analysis and underwriting was what drove prices higher.
Value enhancement became all about financial engineering (i.e. mezzanine debt, capital stacks and waterfalls) and trading (betting cap rates would continue to fall and price momentum was sustainable).
Once the momentum trade was complete, there was another technical sign: a head and shoulders…..
One thing to note: the shoulders are actually taller than the head due to Blackstone’s $39 billion privatization of Equity Office in February 2007, and Blackstone’s $26 billion privatization of Hilton Hotels in October 2007. These events were truly the culmination of the top of the market.
Notice the extended period of time it took to establish this technical signal. It took about 11 months for the head and shoulders indicator to form. This is really a function of CRE being less liquid and transparent than publicly traded securities.
The comment which we could have our next debate on is whether or not technical indicators is an appropriate investment approach for commercial real estate at all. We go back to the Marketwi.se post:
So how do you figure out which way the herd is going to go, and how do you get there first? I guess my thesis is that there is no need to view long term trends. Look at the four quarter trailing trend. When the data point moves aggressively above or below that trendline, evaluate your portfolio strategy.
Here is where we would be apprehensive about using a technical approach. The largest problem with this approach is not that it is a bad idea (it is quite possibly one of freshest takes we’ve seen in years); it is simply that it is not feasible.
Consider Moody’s/REAL CPPI. When they release update to the index, the data is two months old. For instance, they just released their May findings and it is the end of July!
It would be nearly impossible to execute an effective investment strategy rooted in technical analysis. By the time you recognize the data has moved above or below the trendline, it is simply too late.
All that said, we certainly understand Marketwi.se isn’t suggesting making investment decisions based solely on technical analysis, but our question would be, “Do you use it at all?”
Consider Tom Barrack’s latest in his newsletter titled “The Chairman’s Corner“:
Real estate has returned to the hands of real estate professionals, not financial arbitrageurs and most real estate opportunities in the US involve hand-to-hand combat on restructurings or intensive value-added implementation. In either of those two circumstances, the process is slow and low. It is an era of what real estate is supposed to be – singles and doubles.
While Barrack was talking more about current market conditions, the core of this statement is that successful real estate investing requires a long-term, fundamentally-rooted approach.
In the end, we were truly in enthralled by Marketwi.se’s analysis and look forward to many more fresh ideas.
I love that this post mentioned the often used cliche “all real estate is local”. I think people more often than not use that phrase as an excuse to have to actually think about national trends. If I tell myself all real estate is local, it’s easy to tune out the national news if the market is tanking. It’s the most transparent sort of head in the sand thinking.
I’ll have to say, John may be on to something. As sales information becomes more readily available (i.e. RC Analytics, PPR, REIS), the commercial real estate markets will become increasingly transparent. A technical approach like this could become a part of everyone’s underwriting process. It sounds like ING Clarion uses beta to some degree when they construct their overall investment strategy:
http://www.creconsole.com/blog/2010/01/using-beta-to-invest-in-cre/
[...] CRE Console took up the discussion on technical indicators on their blog yesterday which I loved. I would love it if a CRE blogosphere develops to include discussion of real topics, rather than simply “Ten Tips for Hiring Me as Your Broker” type blog posts. CRE Console obviously avoids those kind of posts and I try to do the same. [...]
We couldn’t agree more!