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NewsCalifornia Real Estate JournalNovember 10, 2008 Executives Expect Long, Slow Recovery for Finance and Real Estate By MANDY At this point in the global financial crisis, it is difficult to find an optimist, even in real estate. The Urban Land Institute has given commercial real estate executives multiple venues in recent weeks for sharing their honest opinions regarding present challenges and future opportunities for the industry at local events and in national surveys. Richard Green, director of the
The panelists were Rajiv Patel, managing director of Spear Street Capital in "It's hard to have any significant long-term confidence given the volatility in the market," Flannery said. Within the $700 billion federal bailout approved by Congress last month, government officials planned to invest $250 billion in preferred stock at nine major banks. On Oct. 26, the Treasury Department signed deals with the banks that allowed the government to deploy the first $125 billion to start making stock purchases. Patel stressed that the financial markets are in no immediate danger of collapse, but they remain volatile and the turmoil is having an impact on the economy. He worried that credit concerns would continue until regulators address issues that caused the crisis, such as the financial industry's high debt and high compensation structure. "Particularly with the investment banks, they were like drug dealers with an endless supply of cocaine," Patel said. "The issues are still not being addressed. Morgan Stanley is out raising a distressed debt fund. What are they - the firemen or the arsonists?" If there is a silver lining to the global financial crisis, the panelists said some people will make a lot of money from buying distressed debt and assets while lenders will reassess risk and become stronger so that they can absorb future shocks to the system. Also, real estate values and debt will be recalibrated to more sustainable levels. CMBS Recalibration The market for commercial mortgage-backed securities already is in the midst of repricing assets and setting new standards for future loan originations. Patel estimated that CMBS will come back as a significant lender for commercial real estate, but that market will have a pretty well-defined box of what it will fund and under what terms. "I don't think the securitized market is dead," he said. During a Web conference on Oct. 21 to discuss ULI's annual national report called "Emerging Trends in Real Estate 2009," ULI senior resident fellow for real estate finance Stephen Blank said the CMBS market will be slow to revive itself. In the future, CMBS conduits are likely to make smaller loans than they did before and the debt will not be sliced up and repackaged in as many securitized bonds as the industry had seen during the past few years, Blank said. "What we need to have is due diligence requirements for originators that are similar to what they have in the stock market," he said. The Securities and Exchange Commission requires entities that create investment vehicles to know and understand their investors' needs when they provide products for them. Blank also said the CMBS industry may need to change the way it pays loan originators, offering some cash compensation along with an interest in the debt they originate so they have a stake in how it performs. In addition, he said buyers of CMBS securities need to take responsibility for their investment decisions and the system for rating CMBS bonds may need to be restructured. To refinance CMBS or debt from other capital sources in the near term, property owners will have to put in more equity or pay down the debt relative to the new value. Flannery said there is no exit for property owners facing the end of a loan term. During the next two years, he anticipates that there won't be much commercial real estate that owners are able to refinance. His group plans to do more bridge lending and balance sheet lending. "We'll have to limp along until the market has chances to refinance," Flannery said. During an informal Oct. 16 lunchtime discussion hosted by ULI of San Diego/Tijuana at the offices of law firm Morrison & Foerster LLP, Jon Walz, senior director with Cushman & Wakefield's Real Estate Finance Group in San Diego, said corporations, pension funds and former investment banks are putting together funds to lend on real estate since traditional capital sources are reluctant to do so. Walz said private equity funds and sovereign wealth funds are also planning to become lenders, but they're waiting for the bottom of the market to jump in. While these alternative sources of capital wait to put money out, he said it is likely that Wall Street will come up with a new vehicle to finance commercial real estate. All of those options should increase liquidity, but they will be more expensive. Finding Opportunities "There is $250 billion in CMBS maturing in the next 12 months," he said. "Life companies [lend] $50 billion in a good year and the banks are not lending." Spear Street Capital has an equity fund that is working hard to put together real estate deals on "good transactions with a healthy dose of reality," Patel said. Investors are hoping to hang on through increasing commercial real estate vacancies and tough economic conditions on the horizon. "Tenants in office don't want to lock in long-term leases," Patel said. "We're seeing sublease space in a lot of markets, especially the technology markets where people were confusing strengthening markets with strong markets." "You have to decide how to invest now," Patel said. "The last few years was not normal. I think this is a better market to invest in than the last few years." - E-mail Mandy_Jackson@DailyJournal.com |
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