Like the rest of Wall Street, JPMorgan got burned by the commercial real estate collapse. All told U.S. banks will lose around $160 billion in the crash.
JPMorgan’s Michael Cembalest says failure to get out of commercial real estate was one of his biggest mistakes. He writes in an investment letter:
What stings in hindsight, at least in our own experience, are the prices paid for properties, rather than the quality, location or long-run viability of the properties themselves. Among the decisions I would make differently if I could turn back time: an earlier and larger exit from commercial property tops the list.
After the crash, however, JPMorgan began scooping up bargains:
Since the onset of the recession, we have been opportunistically adding exposure to commercial real estate through distressed property funds, mezzanine financing and commercial mortgage backed securities. To be clear, there are plenty of impaired properties after the construction boom shown on the prior page; but there are just as many valuable ones that are simply over-leveraged, or held by banks that need to shrink their exposure to the sector.
Three years later Cembalest recommends a wholesale return to commercial real estate:
As we look forward to where we go from here, most of our managers benefit from two things. First, they did not use leverage at both the fund and property level, which mitigated the severity of the decline in Net Asset Values. Second, many portfolios retain the benefit of extremely low-cost, long-maturity, non-recourse funding that was borrowed during the credit bubble. The terms and conditions of this financing are often irreplaceable, and as rents stabilise, should contribute to the recovery in NAVs, an effect we are already witnessing over the last two quarters. Two of the charts on page 1 tell the story: there’s less new construction to impede a recovery, and prices have been marked down to reflect a new era of cautious underwriting, slower GDP growth and less demand for space. The new realities of the commercial property markets have finally arrived; while they are painful for existing (pre-crisis) holders, they are more promising for new ones.