Not Quite Heaven, But 2011 Offers Hope

March, 2011
Globe Street Magazine Raines Feldman

LOS ANGELES-While a tremendous amount of distressed debt has started to move through the real estate pipeline, it is mainly the wholesalers-hedge funds, CMBS special servicers, healthy banks who have bought "bad" banks and the national banks-that hold the distressed assets. So said "The Truth About Distress" panelist Taylor Grant, who heads Newport Beach, CA-based Real Estate Receiverships, at ALM Real Estate Media Group's RealShare Real Estate 2011 Conference Tuesday.

"You can expect the wholesalers to start moving the product to the ultimate long-term owners this year," Grant explained to the nearly 1,000 attendees at the event. "Colony Capital, KW Financial, US Bank, Rialto Capital, to name a few, are starting to reposition, foreclose or even sell the notes on distressed assets, added the former developer who has been the receiver for more than $750 million of commercial and residential properties."

Grant joined moderator Jess Bressi, partner of Luce Forward, along with other panelists Mark Bolour, CEO and principal of Bolour Associates; Jackie Brown, senior vice president of Berkadia Commercial Mortgage Inc.; Roger Lundeen, senior vice president of US Bank; and former executive managing director at Voit Real Estate Services John Strockis, now president of Mar Vista Real Estate.

Moderator Bressi began the discussion by providing some key questions and answers to help set the tone. "As of Dec. 31, 2010, there were about 7,000 CMBS loans in special servicing due to actual or imminent defaults, etc. How many specially serviced CMBS Loans were restructured (rather than liquidated) in 2010 through December 2010?" The answer is 354 of the about 7,000 loans in CMBS special servicing were restructured or modified.

Bressi's second question: During 2010, how often did domestic banks foreclose vs. work out defaulted commercial loans? The answer? Domestic banks foreclosed about 71% of the time last year. About 29% of the time, they restructured/modified loans by changing the loan terms, recapitalizing or via other means.

When Bressi asked panelists what factors were driving or inhibiting the availability of distressed investment opportunities, Grant pointed out that unemployment will continue to slow the absorption of anything but superior properties in high-demand markets. "Even if unemployment picks up in the private sector, under the current political scenario we can expect significant layoffs at all levels of government," he explained.

Most significantly, he continued, there are not that many good deals around and there is too much capital looking for the few that do exist. Bolour pointed out that the extend-and-pretend has been going on for about two years now, and he expects to see more assets go to foreclosure.

When asked if he "pretends," Lundeen said that "we are prepared to recognize losses where they exist." He added that US Bank's first effort is to work things out. According to Lundeen, the bank's biggest issue going forward will be "the valuation process."

Echoing Christopher Thornberg of Beacon Economics comments in the morning session, Strockis pointed out that the interest rate environment in the next two years will be low, but says that "We are paying the price today for the future."

Looking forward, Bolour predicts that there will be a lot more note sales. "I think that larger banks that are healthier will sell off more of their notes because they don't want to take it all the way down to REO," he said. "For the buyers of those notes, there is money to be made."

Following the networking lunch, Jim Kilroy, chairman of Kilroy Realty Corp., who was the recipient of the lifetime achievement award presentation, talked about the importance of motivation. "We need to motivate young people because opportunity is there, they just have take it," he said.

Next up was the Industry Leaders Panel: View From the Top, where moderator Lew Feldman, partner of Goodwin Procter LLP, asked panelists if there is hope to be had in the commercial property market looking forward. Bruce Mosler, chairman of global brokerage at Cushman & Wakefield, said that "I would characterize the current economy as a recovering one. 2011 I think will be a significantly better year including the fact that the banks are back to the marketplace and that you are seeing people willing to develop again." On the macro side, he and other panelists said that the gateway cities are the place where they are really seeing a recovery. "Capital is pouring into those marketplaces," said Mosler. David Zimmer, president of Zimmer Real Estate Services, pointed out that the gateway markets seem to be showing the most recovery in terms of industrial product.

According to Mark Gibson, executive managing director of Holliday Fenoglio Fowler LP, "if you look at the debt and equity markets, the good news is that we are a long way from where we were a year ago." He added that "Debt has clearly had an effect on pricing."

During the Investment Market Outlook: Where to Put Your Money and What Deals are Getting Done, moderator Marc Renard, executive managing director of Cushman & Wakefield Inc., began his session by pointing out that "2010 was a pivotal year for the commercial real estate industry and especially the capital markets."

Panelist John Miller, senior managing director and regional director of the West Coast region at Tishman Speyer, agreed, pointing out that "business is improving."

Miller explained that fundamentals in the office market have been improving, and the two things he says provides him with some optimism are: improved fundamentals, and a lot more data points on leasing and rents.

When Renard asked if buyers are overlooking the underlying supply and demand factors, Robert Brunswick, chairman and CEO of Buchanan Street Partners, said that it depends on the table that you are sitting at. But what keeps Brunswick up at night is the low interest rates and low yields that might make people take more risks than they should. "We are seeing a capital market wave not correlated to the economy," he said. "There is undo risk on core asset side."

Kev Zoryan, executive director of Morgan Stanley|Merchant Banking, agreed. "It is clear that the low yield curve is pushing investors outside the risk spectrum," he said.

According to Jim Buckingham, partner of TA Associates Realty, there is definitely a yield premium available in second- or third-tier markets, but he pointed out that "The liquidity of these markets is challenging."

On how much core property values have adjusted since last year, panelists varied in responses. Some said 15%, another said 25%, one was at 30%, while another was at 50%. On who will be the most active sellers over the next year, panelists agreed that banks, lenders and special servicers will be most active.

In the capital markets panel, moderated by Andrew Kirsh, a partner of Raines Feldman LLP, the general consensus was that there is a tremendous amount of liquidity in the marketplace, ranging from traditional banks and private lenders to a resurgence of the CMBS market. "Are real estate lenders ignoring economic fundamentals when there is a significant increase in lending activity in today's market?" Kirsh asked the panelists. The panelists agreed that unemployment is still a concern, but for quality properties in A locations, there is significant competition among lenders to deploy capital for that product.

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