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Bone-Chilling “Plateau” in Apartment Boom Resurfaces, Smartest Money Bails Out

Original newz story - Click here

Last time a “plateau” was declared, the market crashed.

Legendary real-estate bottom-and-top picker Sam Zell, chairman of apartment mega-landlord Equity Residential, got on Bloomberg TV and said, “There is a high probability that we are looking at a recession in the next 12 months.”

This is not even a remote possibility in the Fed’s miserably slow-growth forecasts it issued yesterday. But Zell was once again having a will of his own. He offered a laundry list of reasons: Multinationals are announcing mass-layoffs; global trade is deteriorating; China’s economy might be spiraling down; and “the strong dollar” is hitting US production.

But he said this only after he’d unloaded a ton of commercial real estate: in total 23,262 apartments in five states. The deal was announced at the end of October. Another 4,728 apartments are to be dumped next year.

As his firm pocketed the $5.4 billion it got from Starwood Capital Group for these units, Zell said: With “pricing currently available in the commercial real estate market, it is very hard not to be a seller.”

And prices for office, retail, and apartment buildings are in the most phenomenal bubble ever: up 10% this year through November, according to the Green Street Commercial Property Price Index, after having already jumped 10% in 2014. They’re up 100% from May 2009. They’re up 23% from September 2007, the peak of the insane bubble that blew up. Even on an inflation-adjusted basis, prices are now 12% higher than they’d been during that propitious peak of the bubble:

So Zell dumped about a quarter of Equity Residential’s portfolio and will unload more next year. Most of these units are low-rise and mid-rise buildings, just when a dizzying construction boom is beginning to throw a lot of new supply on the market.

The unnerving thing is that Zell has a history: in 2007, when the commercial property bubble was already teetering, he dumped Equity Office Properties Trust into Blackstone’s lap for $23 billion, not including $16 billion in debt. Then all heck broke lose, prices crashed – see above chart – and commercial property defaults ricocheted around the country. And after the Financial Crisis, he went on a shopping binge.

In one of the most exuberant property bubbles, San Francisco, rents have soared to where we now read editorials like this one in the San Francisco Examiner:

When people talk about the dominant news story in The City, the housing crisis is usually the first thing mentioned. The term “crisis” is not even debated as a description — it’s accepted as fact….  It’s a crisis, possibly a state of emergency, that it’s easier for a camel to go through the eye of a needle than it is for a family to find affordable housing in The City.

But it has been good for the industry. Sky-high rents…