Commercial Real Estate Woes Are Contained

After speaking with Gerard Sweeney, the CEO of Brandywine Realty Trust (BDN - commentary - Trade Now), a classic commercial real estate operator of office buildings, it is more clear to me than ever that the woes of commercial real estate are directly related to when a proprety was bought not what it is. In other words, if you bought an office building between 2005 and 2007, you are probably going to default. But if you didn't, and you just own a lot of buildings at decent prices, you are probably just going to make less money than you would have otherwise, as you are losing a tenant here and a tenant there, and it's crimping business.

Plus, according to Sweeney, it has gotten better, not worse, in the last few months, with prospective tenants actually kicking the tires, something that didn't happen for a year. Most important, in his key markets of Pennsylvania, New Jersey and Delaware, business is up nicely year over year. No wonder if you participated in his recent underwriting, you caught almost a double.

Sweeney made it clear that if it weren't for the equity markets, many of real estate investment trusts that had any debt coming due during this period would have not been able to make it. They had no place to go, which means, as he said, the private commercial real estate buyers from 2005 to 2007 are just being left behind. That's the real issue, and the good news there is that the public markets are wide open for those REITs that want to buy from the distressed borrowers, and they can pick and choose to buy whatever they want.

I know that everyone wants to make this commercial real estate issue the next big ticking time bomb, but my issue with that is it is a heck of a lot easier to:

1. repossess; and
2. sell to companies like Brandywine than is residential real estate in Miami or the Inland Empire.

I came away more bullish than I thought I would be. I try to explain it away as knowing that Brandywine is one of those REITs that survived other bad times like 1990, but I also simply believe this problem is contained and will be dealt with without the bloodshed so many anticipate.

At the time of publication, Cramer had no positions in the stocks mentioned.

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Know what you own: Other diversified REITs include Plum Creek Timber (PCL - commentary - Trade Now), Rayonier (RYN - commentary - Trade Now), Duke Realty (DRE - commentary - Trade Now), National Retail Properties (NNN - commentary - Trade Now), Douglas Emmett (DEI - commentary - Trade Now) and Franklin Street Properties (FSP - commentary - Trade Now).

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