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By Jason Stipp | 02-16-2010 12:36 PM

Signs of Life in Commercial Real Estate

Markets editor Jeremy Glaser takes a look at Simon's bid for General Growth and what it says about the state of the commercial real estate market.

Jason Stipp: I'm Jason Stipp with Morningstar. Real estate news topped the headlines this week, with Simon Property Group making an offer for General Growth Properties, which is a firm in bankruptcy, for about $10 billion, or $9 per share. Here with me to dig into the deal is Morningstar's Jeremy Glaser. He's a market's editor and also a former real estate analyst here at Morningstar.

Thanks for joining me, Jeremy.

Jeremy Glaser: You're welcome, Jason.

Stipp: First question for you, Simon Growth runs malls, General Growth also runs malls. What does this combination mean, and most importantly for Simon shareholders, what did they see as the opportunity here?

Glaser: Simon's been raising a lot of money for a while now, re-capitalizing their balance sheet, which has always been pretty strong, looking for opportunities, looking for distressed malls. And I think they've probably been stalking General Growth for a while now.

Even before the firm entered bankruptcy, there was talk of Simon being a potential suitor, being a white knight and coming into those properties. So I think that they finally decided that they could get a good price, to come in and get some pretty good assets to add to their already sizeable position as the largest mall owner in the United States.

Our REIT analyst pegs it around a 7% cap rate, which means your return on your first year is about 7%, which is pretty good in this space, especially given those malls that at the peak were trading at 3%, 4%, 5% cap rates. Which obviously now those valuations look a little bit crazy.

So I think they saw that they could get a really good price on some good assets, and they could leverage their strong balance sheet to take care of the financing problems that got General Growth into trouble in the first place.

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