Rush to the Rescue (1/22)
Jan 22, 2009 10:44 AM, By Elaine Misonzhnik
Not your father’s downturn
But the new crop of special services professionals will face some challenges in handling the wave of distressed assets now coming along, according to Frank Liantonio, executive vice president of capital markets with Cushman & Wakefield and part of its resolution group. The last round of massive commercial real estate dispositions happened in the 1990s. Then, the government took bad assets from defunct savings & loan associations and formed the Resolution Trust Corp. to dispose of almost $400 billion in real estate. At the time, the securitized debt market for real estate properties was virtually non-existent. It was the Resolution Trust’s own success in creating and selling shares in limited partnerships and securitizations to work through the bad debt that contributed to the explosion of mortgage-backed securities later.
Today, after a decade of uninterrupted growth, there is approximately $812 billion in outstanding CMBS loans, according to Reis, Inc., a New York City-based real estate information provider, and the MBA. Retail properties account for about $240 billion of those loans. The issue that creates is that loans that have been securitized have multiple claims to the cash flow as opposed to when there was a more straightforward one-to-one relationship between lender and borrower. The multitude of claims will make it difficult to reach consensuses on how to handle distressed assets.
What’s more, the real estate crisis of the early 1990s was not exacerbated by a global recession and a global credit crunch, notes Liantonio. “This financial crisis starts at 5:30 in the morning, when I turn on the news and hear what happened in Europe, and ends at 9:00 in the evening, when the Asian markets are about to open,” he says. “It’s clear this is a global issue.”
This matters because one of the most common vehicles for disposing of troubled assets is to sell them at a discount, according to Milston. But with the current freeze in capital markets, few players have enough cash and feel confident enough about estimating the true value of for-sale assets to invest heavily in distressed properties, at least not yet. In November, investment sales volume for retail totaled $600 million, representing an 83 percent decline from November 2007, which was a slow month in itself, according to Real Capital Analytics. Offerings outpaced closings 5:1.
“There is an unfortunate high level of uncertainty out there,” says Spencer Levy, senior managing director with CB Richard Ellis’ restructuring services group. “A lot of the buyers can’t say what they would buy today, or what they would pay for that.”
As a result, a lot of banks have been staffing up their asset management teams in case they end up holding properties longer than anticipated, says Esnard. Among strategies they might consider are capital infusions and bundling up distressed assets into more attractive for-sale portfolios, according to Milton.
Putting all of these factors together, it will likely take up to three or four years to resolve the current logjam, says Milston. One bit of bright news for the real estate industry, however, might be the fact that the U.S. is expected to emerge from the recession earlier than the rest of the world, which is why some foreign investors have started to express interest in U.S. properties.
“What’s happening is that people are beginning to mark to the right market,” says Baker. “The opportunities are beginning to emerge and they are beginning, in isolated cases, to look more attractive. You will see capital flow back into the sector sometime in the middle of this year.”
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