This Real Estate Rout May Be Short-Lived

In an interview with National Real Estate Investor, economist Hugh Kelly addresses the availability (or lack thereof) of capital and takes a guess at when it may return:

There is such a volume of capital out there. I have three pictures I use in my talks, one is of Niagara Falls, one is the Sahara Desert and the third is the Hoover Dam. The argument is that for a long time we had a Niagara of capital, now people think we have a Sahara but we don’t. It’s a Hoover Dam. It’s all sitting back there. The question is when does it get released? And when it does you don’t knock the dam down, you just release the water again. That’s the 2009 scenario when you see some of this capital released into the markets in an orderly way.

I think it is highly unlikely that the independent investment banks will be acquired for two reasons, (i) the commercial banks don't need them, and (ii) past experience with such acquisitions has been disasterous. To the former, JPM doesn't need to buy Lehman or Merrill because JP has built a successful investment banking franchise on their own. To the latter, CSFB's acquisition of DLJ was a disaster for everyone but the DLJ shareholders. The Citi acquisition of Salomon was only marginally better. Both acquisitions probably destroyed value. For these reasons, none of the large commercial banks will touch MS, GS, MER etc, in my opinion.

Also, when I was an analyst on Wall Street in the late 90s, everyone wanted to work for DLJ or Morgan Stanley, ie the prestigous independents. When I was in business school in the early part of this decade, everyone thought going to work for Citibank or JPM was the "thing to do" because the full-service, be-in-everything business was working at the time. This has reversed again and people think the right model is the Evercore "independent advice" model. This will ebb and flow as it always has, and there will always be an appeal to clients for banks like Evercore, Centerview, Perella, etc.

Furthermore, to all of this nonsense about commerical banks not paying sizable bonuses: JPM morgan pays their investment bankers just as highly as Morgan Stanley does. And Evercore. And Perella Weinberg. And Goldman Sachs. Becase they have to. And that isn't going to change.

Admittedly, this has precisely nothing to do with Manhattan real estate, but since people are talking about it...once person's perspective....

unnamed- How do you see bonuses for this year across the board.

"I think it is highly unlikely that the independent investment banks will be acquired for two reasons,..."

Perhaps so, but the Fed pushed Bear on JPM so it could be a regluated entity as it may want to do to Lehman.

dco...the million dollar question, if you'll forgive the pun. if you look at what the banks have accrued for compensation expense YoY through 2Q it is down 20-30% in general, even adjusted for reduced headcount. JPM was notably higher (comp expense as a % of revenue) this morning and Jamie Dimon commented about it on the conference, saying he thought it was important to maintain employee morale. Whatever that means.

My sense is bonuses this year will be highly variable depending on the area of the firm and how senior you happen to be...investment grade bond guys will get paid well, equity guys so-so, M&A guys not well, and alot of cap mkts guys will be lucky to have jobs. My gut tells me average comp on the Street will be down ~30%+, what the accruals tell us, and assuming things don't deteriorate further in the 2H.

> When I was in business school in the early part of this decade, everyone thought
> going to work for Citibank or JPM was the "thing to do" because the full-service,
> be-in-everything business was working at the time.

Yes, everybody took offers from Citibank over Goldman. I heard that joke too. From a guy at Citi, of course.

> JPM morgan pays their investment bankers just as highly as Morgan Stanley does.
> And Evercore. And Perella Weinberg. And Goldman Sachs

Wishful thinking.... but check the actual average compensation. They might try and hire away someone evey now and then, but you can't pay everyone more when you make less in teh first place. And the banks are pretty consistent about paying out the same share of profits overall, that doesn't differ much.

Wasserstein and Lazard and Blackstone used to pay more back in the day only because they did big deals but had smaller teams.... so there were fewer folks to split the pie. But the boutique days are over.

I don't work at Citi, thankfully. You make a good point though re: Goldman, but I would still say that JPM, C, DB and BOFA had a lot of success recruiting people when lending was a key differentiator (it still is to some extent) and when credit was cheap for LBOs. Neither of those are the case anymore.

And the boutique days are over? The only two firms who have stock prices higher today than two years ago? Lazard and Greenhill. The banks on the Street most successfully picking off talented senior bankers at the moment? Moelis and Perella. The days of the pure boutique are most certainly not over.

> And the boutique days are over?

Back in the day, Blackstone, Lonestar, Wasserstein Perella, and all the boutiques picked off top bankers (and got top analysts) left and right. You could impress your friends by going there. Hell, they were almost all started by heads of banking leaving... Wassserstein was first boston, etc...

That has not been the case in a *long* time. Blackstone probably had the longest run, but thats clearly over (and it was partially because of LBO rep, not banking rep). I know some folks who went to Perella but only because they were offered big bumps. Folks looking for top names really aren't looking at the Greenhills of this world anymore. And their chart numbers aren't anywhere where boutiques used to be.

I also would not call Lazard boutique anymore... they're PUBLIC. So, more proof boutique days are done...

If it were not so sad it would he very very funny.

Experts three years ago: Short lived.
Experts now: 9 more years of dragging on the bottom (see CNBC today).

lol!!!

Amazing. There is sure a lot of hindsight on this site. Barron's is always reprinting how correct they were in retrospect. Someone should send them the article of OP and dare them to reprint. We are in circumstances that are unique in history. How can you believe anyone.

>>>How can you believe anyone.
Don't

review the facts, make your own educated decision.

stevejhx
about 4 years ago
Posts: 12562
Member since: Feb 2008
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>The NY Times is the same as streeteasy - mostly condo owners looking to meet costs. Nonetheless I would say that $4,500 to $5,000 would be a reasonable median for Chelsea 2br 2ba.

What's it running today?

petrfitz
about 4 years ago
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>In Chinese, the words for crisis and opportunity are the same. That's how I see this current market.

Is this true? In which Chinese language anyway?

Greensdale try this thing called google

"Is this true? In which Chinese language anyway?"

It's not true. 'Crisis' and 'opportunity' are two-character words to begin with, and while they do have one character in common, that one means something more like 'inflection point': danger 危機 (danger + point) and opportunity 機会 (point + meet).

The fact that they share one character should be enough to create a pithy saying; it's too bad that this one has been misunderstood.

Again, all these so called 'EXPERTS' on this site were DEAD WRONG.

Opportunities were staring them right in the eye and they let it go and the folks they called crazy by buying are now greatly rewarded.