Markets: NYC Real Estate Better Deal than Apple

Markets: NYC Real Estate Better Deal than Apple Many experts say the Great Recession is starting to recede. They point to statistics that show an increase in the Gross National Product for the first time in two years, a reduction in the trend of home foreclosures and an improving stock market. Yet there are others who tell a different tale. They say that the real estate market is still flagging.... [more]

Markets: NYC Real Estate Better Deal than Apple Many experts say the Great Recession is starting to recede. They point to statistics that show an increase in the Gross National Product for the first time in two years, a reduction in the trend of home foreclosures and an improving stock market. Yet there are others who tell a different tale. They say that the real estate market is still flagging. They point to high home prices and the fact that banks still aren’t lending. They say that sellers of real estate must keep lowering their sales prices even further. I took an alternative approach in looking for an indicator of the economy, in general, and the Manhattan real estate market, specifically. The results are something to consider. Measuring Market Confidence I decided to identify a company that has not only reported strong financials, but has a favorable reputation as a business. That company is Apple. Apple’s stock price has exploded over the last few years, from a low of $38 a share in 2005, to a current price of about $200 per share. It was during this time period that the company generated excitement with the iPod, the iPhone and iMacs. Apple’s future has been considered to be pretty good, and yet there are doubts the company’s ability to maintain its terrific growth with the new products it has presented. It has had a good run, but will it continue? I decided to compare Apple to another computer company that has had a less-than-stellar path, Dell Computers. Five years ago, this company was selling at a price similar to Apple’s, around $38 a share; however, five years later this company is selling at $14. Dell suffered from the “commoditization” of its product and a failure to develop any new, innovative technologies that could permit it to distinguish itself in the marketplace. However, most people still believe that Dell creates a pretty good product, and it is the second largest producer of computers in the United States. Even though it has fallen, there still is an impression that it has bottomed out and stands a good chance of dramatically improving its position when a stronger economy arrives because of its aggressive pricing structure. I wanted to develop a means to identify which company the marketplace thought was better. I decided to use a measure popular with investors in evaluating companies, Price Earnings Ratio, often referred to as “PE.” If a company has a high PE it means that the price is aggressive relative to its earnings. It is, therefore, a measure of the market’s confidence in the ability of the company to generate future profits. I was surprised to find that the PE ratio for Apple is 19.52, while for Dell it is 18.68. The level of similarity means that investors perceive that the upside for each company is about the same. Thus, Dell is as good an investment as Apple, at least based on this measure. Evaluating NYC Real Estate Prospects Now that I had a sense of the potential of computer companies to make me a profit, I decided to apply this same principal in evaluating real estate in New York City I chose three companies that are active players in the local market, Avalon Bay, SL Green and Vornado. Avalon Bay is a large Real Estate Investment Trust that builds and manages residential properties. The company has taken a major position in the New York City market. Five years ago its stock price was almost 68. It rose in the boom of 2007 to a high of 146 and then declined, due to the current economic circumstances, to a current value of $76. It currently has a PE ratio of 39. SL Green is also a Real Estate Investment Trust, which owns predominantly New York City commercial properties. Five years ago its stock price was approximately $58, and now its stock price is about $46. It currently has a PE ratio of 85. Vornado is a large Real Estate Investment Trust that is substantially positioned in retail real estate in New York City. Five years ago its stock price was $71, and its current stock price is $62. Its PE ratio is an astounding 1,140. In looking at the PE ratios of these companies, I am astounded by their strength! Every one of them has a PE ratio that leaves companies like Apple in the dust. The fact that a company’s stock price goes up or down is clearly not an issue -- what is important is what an investor thinks the company will do given what is known today. It seems to me that investors are saying, “Given what I know right now, New York City real estate is good opportunity.” I agree. The inventory of available prosperities in the summer was over 12,000 units in Manhattan. Now the inventory is around 8,700 units. That’s almost a 30% reduction in supply. Mortgage money is really cheap for qualified buyers and it’s readily available. Sellers are still very accommodating, but I don’t that will last for long. The Future? While there are some experts who may have qualifying language about PE ratios, I propose that every one of them would say that the market has expressed a very positive indication about the near term prospects for New York City real estate. It may not look that good today, but the investing public thinks that New York City real estate is a better deal than Apple. I think that’s food for thought. Neil Binder President Bellmarc Realty On Twitter: www.twitter.com/bellmarc On Facebook: www.facebook.com/bellmarc On the Web: www.bellmarc.com [less]