Investment property
Pages: 1 [2]
Globe.St.com"s Editors Look at Commercial Real in 2010 – and Beyond
not going to move out of their parents" houses or they are not going to move out of their roommates" and rent units of their own. Until we see the jobs, which really isn"t expected until 2012 at the earliest, it"s not going to happen. But, in terms of performance and revenues, owners are doing a pretty good job of keeping occupancies high and maintaining rental revenues. Mosca: Danielle, can give us an overview from the capital markets perspective or would you prefer to give us an overview of distressed assets or a combination thereof? Douglas: I"ll blend all of them since they all are interrelated. In terms of distressed assets, between now and 2012, roughly more than 1.4 trillion worth of commercial real estate loans will come due according to ING Clarion and most traditional sources of lending as you guys know have dried up, meaning that much of that debt will probably be defaulted upon. There is roughly $100 billion worth of assets already in special servicing as of this year and I guess one of the biggest things right now is paying attention to what the special services do with those loans. The Financial Accounting Standards Board for instance relaxed some of its accounting standards mainly market to market, which affects whether or not banks trade some of the assets on their balance sheets. Earlier in the last month or so the Federal Reserve decided to offer guidance on how banks can go about doing their workouts and how special services can also go about doing their workouts easing some of the restrictions that were previously in place as well as being a bit more permissive as to how people could deal with bad loans and repackaging some of that “bad debt” into new offerings. Mosca: Is this a great time to get into distressed assets, build a strategy and take advantage of what for many is a once in a lifetime investment opportunity? Douglas: Certainly. In a lot of ways we can look at this current distressed situation as similar to the distressed situation for the days of the Resolution Trust Corporation back in the early "90s. Granted the circumstances that got us into this situation aren"t the same. There are a lot of opportunities to be had just like there were during that time. If you think about the people who became top owners as a result of the amount of assets that were on the market, like Sam Zell for instance, a smart savvy investor could do the same in this market. The only thing is that we"re not seeing the wealth of deals coming onto the market as you did that time around. Activity has been with a lot of FDIC sales and auctions, FDIC auctions as well as private auctions, but there is a lot of private equity and REITs that are gearing up to try to buy this stuff once it gets onto the market. There are generally two strategies that are being employed now. There is the loan to own strategies where they are buying the debt in hopes of owning the underlying assets, which despite what"s going on in the market still has great value. Some people are also employing the loan to loan strategy where they are buying the debt in hopes of trading the debt possibly to the borrower who has defaulted, trading it back to them or trading it onto someone else who is interested in loan sales. Mosca: Sule, are you seeing distressed assets making their way into the multifamily sector? Carranza: Up until now we haven"t seen too much multifamily distressed but the recent report by Moody showed that at least in the CNBS delinquency, the multifamily properties saw the second largest increase among all property types. It was more than 90 basis points, almost a full percentage point to 7.4% over the past month so the delinquency rate is going up and I do expect the more distressed properties coming on the market. Mosca: Danielle, do you see the commercial distressed market having a major negative impact like the subprime on the residential side or do you think that because of government intervention, because of the industry working itself out, that the commercial distress won"t have as negative an impact as the residential subprime fiasco? Douglas: It"s hard to compare. Capital needs to be flowing again in order for a lot of this debt to be refinanced and for commercial real estate not to implode. I want to touch on one of the earlier things you mentioned about where distressed is in terms of the different property types. Hotels actually hold the highest level of distressed at $32 billion worth of hotel properties. Office is at 28 billion. Apartment is about 27.9 billion and industrial, which was never really highly leveraged, is just about $5 billion, according to Real Capital Analytics. That might be important for your investors to know if they are interested in looking at these property types. Mosca: Is the Obama administration mindset any different than the prior Bush administration"s mindset or is it basically all the same no matter what political party might be holding the White House at a particular time? Douglas: There are a lot of intelligent and sophisticated people who are part of Obama administration but they are not necessarily business people. They don"t necessarily understand how free markets totally work but at the same time they are trying their best to do whatever they can in order to save the economy. While I agree that there was some TARP money needed in order to save us from further peril, I don"t know necessarily if the policies put in place will help. With Bush, in some circles he was considered more so of a friend of the business community. The financial crisis was already there when the Obama administration took office and they had to do as much as they could in order to address it. Mosca: What is your golden nugget? Carranza: Go after cash flow. Don"t be afraid of taking your time in the market and looking for the right property. They are out there. Douglas: Investors interested in getting into distressed assets should look at distressed loans. If you are interested in a loan to own strategy, pay attention to the underlying problems of the property that you are hoping to own.Pages: 1 [2]