A quarter of a billion dollars is a fairly substantial gamble for any organization, no matter how deep its pockets. While there remains a significant amount of pessimism in the market, I view the move Lightstone Group made a few days ago as a positive sign that there are some who believe that the bad times may be coming to an end. As noted in the third paragraph below, fear leads to panic, and panic leads to occasionally illogical behavior, which can create opportunities for others not drawn to the herd mentality. Only time will tell if this was a smart or a foolish move. I'm betting on the former...
In Detroit, Lightstone Group Is Bullish About a Contrarian Gamble
By JENNIFER S. FORSYTH June 28, 2006
David Lichtenstein is placing a big, contrarian bet on Detroit -- an area that has lost more than 200,000 jobs in the last five years.
His Lightstone Group is expected to close today on a purchase of 19 apartment complexes in the Detroit suburbs from Home Properties Inc., a publicly traded real-estate investment trust, in a transaction valued at $260 million including closing costs and capital improvements.
"There's no doubt that Detroit is not the rosiest of markets," concedes Mr. Lichtenstein, president and founder of Lakewood, N.J.-based Lightstone, one of the nation's largest private owners of real estate. "Panic sets in and everybody runs to the door at the same time. That represents fear. And fear represents a good buying opportunity."
As of May, Detroit led all major metropolitan areas in unemployment, at 6.9%, according to the U.S. Bureau of Labor Statistics. The national unemployment rate was 4.5%. The best guess of Moody's Economy.com is that the area will lose another 40,000 jobs by the end of 2007 -- the ripple effect of labor-force paring by auto manufacturers and their suppliers.
In many ways, things don't look much brighter for apartment landlords. A report published in April by Boston-based Property & Portfolio Research Inc. points out that apartment vacancies remain near cyclically high levels, with increased construction adding to the woes. Population growth in the area is stagnant, adds Jim Rhein, a labor-market analyst for the Michigan Department of Labor & Economic Growth.
Little wonder, then, that Home Properties wanted to dump its Detroit properties, totaling about 4 million square feet. "Their analysts were killing them," Mr. Lichtenstein says. Charis Warshof, vice president of investor relations for Rochester, N.Y.-based Home Properties, says the sale is motivated by the company's focus on the East Coast, but agrees the Detroit market "has been soft and that the portfolio has not been performing as well as others of ours recently."
Here is Lightstone's view: The company is acquiring the properties at a 7.75% capitalization rate -- the return on investment in the first year of ownership -- which Mr. Lichtenstein argues is two percentage points higher than similar properties across the nation. So the risk has been factored in. Plus, the occupancy rate for the properties averages 90%, with only about one out of 10 residents employed in the auto industry, he says. Moreover, rising interest rates are benefiting apartment owners everywhere as consumers debating whether to buy a home or rent lean toward renting.
Mr. Lichtenstein acknowledges people would rightfully believe he is out of his mind if he put 100% of his firm's assets into the Detroit market. But this purchase will be pooled with properties in more than 30 markets across the country, blunting the potential blow from any one area. Lightstone's Detroit properties will now make up about 20% of its apartment portfolio, but only about 5% of its total holdings, which include office and retail properties.
As for this particular investment, Mr. Lichtenstein suggests "you should mark this on your calendar and in three years say, 'David, were you insane or were you a genius?'"
By JENNIFER S. FORSYTH June 28, 2006
David Lichtenstein is placing a big, contrarian bet on Detroit -- an area that has lost more than 200,000 jobs in the last five years.
His Lightstone Group is expected to close today on a purchase of 19 apartment complexes in the Detroit suburbs from Home Properties Inc., a publicly traded real-estate investment trust, in a transaction valued at $260 million including closing costs and capital improvements.
"There's no doubt that Detroit is not the rosiest of markets," concedes Mr. Lichtenstein, president and founder of Lakewood, N.J.-based Lightstone, one of the nation's largest private owners of real estate. "Panic sets in and everybody runs to the door at the same time. That represents fear. And fear represents a good buying opportunity."
As of May, Detroit led all major metropolitan areas in unemployment, at 6.9%, according to the U.S. Bureau of Labor Statistics. The national unemployment rate was 4.5%. The best guess of Moody's Economy.com is that the area will lose another 40,000 jobs by the end of 2007 -- the ripple effect of labor-force paring by auto manufacturers and their suppliers.
In many ways, things don't look much brighter for apartment landlords. A report published in April by Boston-based Property & Portfolio Research Inc. points out that apartment vacancies remain near cyclically high levels, with increased construction adding to the woes. Population growth in the area is stagnant, adds Jim Rhein, a labor-market analyst for the Michigan Department of Labor & Economic Growth.
Little wonder, then, that Home Properties wanted to dump its Detroit properties, totaling about 4 million square feet. "Their analysts were killing them," Mr. Lichtenstein says. Charis Warshof, vice president of investor relations for Rochester, N.Y.-based Home Properties, says the sale is motivated by the company's focus on the East Coast, but agrees the Detroit market "has been soft and that the portfolio has not been performing as well as others of ours recently."
Here is Lightstone's view: The company is acquiring the properties at a 7.75% capitalization rate -- the return on investment in the first year of ownership -- which Mr. Lichtenstein argues is two percentage points higher than similar properties across the nation. So the risk has been factored in. Plus, the occupancy rate for the properties averages 90%, with only about one out of 10 residents employed in the auto industry, he says. Moreover, rising interest rates are benefiting apartment owners everywhere as consumers debating whether to buy a home or rent lean toward renting.
Mr. Lichtenstein acknowledges people would rightfully believe he is out of his mind if he put 100% of his firm's assets into the Detroit market. But this purchase will be pooled with properties in more than 30 markets across the country, blunting the potential blow from any one area. Lightstone's Detroit properties will now make up about 20% of its apartment portfolio, but only about 5% of its total holdings, which include office and retail properties.
As for this particular investment, Mr. Lichtenstein suggests "you should mark this on your calendar and in three years say, 'David, were you insane or were you a genius?'"
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