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Too Much Money Chasing Deals

Remember back in the halcyon years of 2007 and early 2008 when commercial real estate prices were high and yields were low? Real estate investors large and small were having a hard time finding investments that offered sufficient yield. A common phrase was,“There’s just much money chasing deals.”

Fast forward to today, just six years later. If you thought there was too much money chasing deals in 2008, well now there is even more money chasing the same deals. Our central bank has “printed” several trillion new dollars since then. China has to print a lot as well to keep their currency low to give their manufacturers the unfair advantage they have enjoyed for years. Japan has decided to print a lot of money. Their new leader Abe has basically said he will print unlimited yen to keep the Japanese currency cheap and create inflation at home.

Commercial real estate prices in America have rebounded dramatically in the past two years. But does this mean the buildings are overpriced, or does it mean that the value of money is just declining? When governments freely print trillions of dollars all over the globe, it makes sense that the worth of individual dollars, yen, yuan or euros goes down. Whenever there is a glut of anything, its value declines.

Here is what I’ve noticed in recent months:

  • S&P 500 companies have $1.9 trillion of profits they have earned outside of America doing virtually nothing.
    • Apple has $132 billion overseas.
    • GE has $57 billion overseas.
    • Pfizer has $49 billion overseas.
    • eBay has a miserly $9 billion outside of America.
  • Corporations and large investors have $904 billion parked in U.S. prime money market funds that earn virtually nothing.
  • There is a total of about $2.6 trillion in U.S. money market funds that earn virtually nothing.
  • A recent report from Bain Capital suggests that private equity (PE) firms had more than $1 trillion in unused cash at the end of 2013. Trust me, PE firms and their investors do not like to have cash earning nothing.
  • Goldman Sachs recently raised $2.4 billion for its second real estate debt fund. With leverage, it will be able to buy over $4 billion in maturing commercial real estate loans.
  • Carlyle Group raised $5.5 billion in new equity capital in first quarter 2014, raising its total assets under management to $198 billion.

As you can see, money is everywhere. It’s looking for work. It’s sitting around doing nothing. It is searching for yield. When a solid real estate deal comes to market in coming months, it will garner a lot of attention.

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