It’s been a while since any material regarding Thomas Barrack, Jr., appeared on Investorazzi.com. Which is a real shame, considering he is seen by many as the world’s greatest real estate investor. Well-known real estate magnate Donald Trump said the following about Barrack:

Tom has an amazing vision of the future, an ability to see what’s going to happen that no one else can match.

Barrack’s Colony Capital, one of the largest private-equity firms devoted solely to real estate, has achieved a 24% annualized internal rate of return (IRR) over the last 17 years.

Getting back on track, earlier today the latest installment of Barrack’s “Chairman’s Corner Blog” was posted on the Colony Capital website. His global investment outlook isn’t pretty. The legendary investor wrote:

Let’s review the state of play for the last week and attempt to re-calibrate where we are. Clearly the storm clouds are gathering across the world, establishing the worst global recession in six decades, blended with a financial and banking crisis which is accelerating daily. What we all want to know is “how much worse can it get?” For those of you who have better things to do, read no further, the answer is “much worse”.

What is happening???

There is nothing good to find:

• Commodity prices freefalling at a pace never before seen
• Dramatically reduced industrial output
• Consumption and sales evaporating
• Disappointing earnings in all sectors
• Unemployment at staggering levels and numbers are still padded
• Defaults in housing mortgages accelerating
• Foreclosures on single-family residences increasing
• Corporate defaults on various debt instruments increasing
• Commercial real estate values falling and commercial real estate loan defaults on the horizon
• Regional banks the next to fall
• Previous capital infusions and all writedowns by big banks will prove to not be enough
• Citibank mystery still unsolved
• Auto industry in meltdown and on verge of nationalization and the airline and insurance industries right behind it
• Japan, China and Europe all undergoing economic disruption and an explosion of protectionist maneuvers
• TARP has been mired in capricious stealth and has not addressed the mortgage securitization market or its liquidity at all
• The toxic dump will now include CLOs, CDOs, CMBSs and CDSs
• Consumer confidence at historic lows
• Government debt levels and deficits at historic highs
• In spite of the deficits the dollar is increasing in value because the market views everything else as worse
• Gold prices falling
• Many Europeans in search of Bretton Woods II
• Bush administration in paralysis, Obama administration using training wheels

The affect of all of the above is just starting to trickle down to the normal person in the economy. Now let’s take a look at some other factors which further exacerbate the situation…

Barrack, an avid polo player who sold off his U.S. real estate holdings in 2005 because of too many “amateurs” on the playing field, discussed the “other factors” that were complicating the global financial situation. These included:

• Fair Value and Mark-to-Market
• TARP
• Hedge Funds
• Private Equity
• Real Estate
• Sovereign Wealth Funds
• Stocks and Bonds

Regarding his “specialty,” real estate:

The real estate sector, beyond residential, appears to have less volatility due to the fact that financing vehicles are designed to be patient and very few transactions are taking place. As we have discussed, it takes awhile for user trauma at the occupant level to drift to the landlord and ultimately from the landlord to the lender. There is nothing healthy happening in commercial real estate and if this holiday season is as bad as predicted for retailers there will be a new wave of trauma amongst owners of retail real estate. Not many firms are planning expansions or contemplating add-on facilities at this point in the cycle. The long term nature of leases has always helped real estate be a good co-variance diversifier against stock and bonds. However, much of the vintage 2006 and 2007 office acquisitions were financed against “to be leased” pro formas at now unfathomable rental levels. Once the interest reserves expire the CMBS will become self detonating.

On the topic of stocks and bonds, he pointed out:

Valuations of equities most likely have nowhere to go in the short-term except down. The bear market rallies only afford a moment of escape for all the prisoners.

Barrack summed up his thoughts about current and future conditions when he wrote:

Bottom Line

The governments of the world are “in”. The financial institutions of the world are “out”. The market is not yet clearing the “toxic waste” and the trickle down effect into the consumer economies is just beginning.

Course of Action

Patience and advanced survival techniques.

You can view Barrack’s post on the Colony Capital website here.

Source:

“A Dose of Reality”
Thomas J. Barrack, Jr.
Colony Capital, November 10, 2008

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