All owners of commercial real estate are curious about the trends in “distressed” real estate, whether they are one of the troubled owners or just wondering how all of this is going to affect the value of their property. The news media is reporting stats like two thirds of all commercial real estate loans coming due in the next year are underwater. This portends high rates of foreclosures and falling prices.
I attended the Distressed Real Estate Summit in Los Angeles on February 3. Panel after panel of phenomenal speakers gave the 500 attendees a good feel for what is happening out there today. Things have changed…dramatically.
The market mood and what is actually happening on the street is schizophrenic. Several speakers related the buoyant mood at the recent lenders conference in Vegas. Institutional debt is off the sidelines and itching to be invested. LTVs have gone from 50% just 90 days ago to 70%. But here is the “Catch 22″: nobody can agree on what “V” is today!
There are hundreds of billions in equity capital — what I like to call “dry powder” — also looking for worthy real estate assets to invest in. All of this debt and equity capital is targeting the few choice real estate assets out there, creating a bidding frenzy. Well located properties on the market are generating 30 to 50 offers. Cap rates are actually compressing as a result! If you are seeking an IRR greater than 12% on prime assets, you are out of the game. Can you believe it? I was stunned.
Lenders continue to “pretend and extend” and aren’t foreclosing as much as the vultures thought they might. This is exacerbated by the FDIC’s directive that lenders work out their loans with the borrowers. And this includes all of the CMBS (Commercial Mortgage Backed Securities) debt that is upside down out there: the special servicers (the administrators of these loans owned by countless institutions that own a sliver of each CMBS loan) are also approachable.
Amidst all of the excitement in the capital markets, the fundamentals remain grim for most commercial real estate; from worst to best, hotels, office, retail, industrial, and multi-family. Fundamentals will remain in the doldrums as long as unemployment remains high and job growth is absent.
What I took away from the day is that the next couple of years will be a roller coaster ride. Many investors, including the very big hitters are having doubts that the tsunami off distressed real estate opportunities will ever materialize. I think it is a windy road we’re on, with unpredictable weather ahead. Stay tuned.