Key Points from NYU Commercial Real Estate Capital Markets Conference

Courtesy of some CRE Analyst readers….

General themes

• Unlike most other recessions, we are in a “demand” recession – when the economy recovers, absorption should occur relatively quickly; however at 30% lower rents
• Full buildings will have debt in excess of value, but very little motivation for owners to sell – deleveraging is inevitable
• Result – fewer foreclosures; most owners will seek new infusion of capital with heavy dilution to existing equity (“Hope certificates”)
• Current owners are unlikely to realize much value
• Portfolio lenders such as pension funds/life companies are lending cautiously at low LTVs – 50-60%
• 2010-2012 – an estimated $1.3 to 1.8 trillion of mortgage debt is expected to mature; where will the debt come from?

Sam Zell – Keynote Speaker

• In an era of extend and pretend – low interest rate environment keeping loans current
• Predicts low interest rates in the foreseeable future (18-36 months)
• Necessity is mother of invention – formation of REIT market in early 90s due to complete lack of capital (Equity Residential (EQR)– 100% private ownership at 90% leverage; ended up owning 20% of company that was 40% leveraged)
• Many private firms will seek capital from the public market
• Does not see grave dancing opportunities except for the hotel sector
• Back then it was “Stay alive until ‘95; today it is come clean by ‘13”
• One possible scenario for banks to come clean – banks are enjoying extraordinary earnings (7-8% margins) which can be used to offset the hit on impaired assets

Equity panel

• It is extremely difficult to raise new capital in the current environment
• Many investment shops raised significant amounts of capital in 2008 and have deployed very little since then

1. Westbrook – 2.8B
2. AREA – 2B (US), 1B (Europe), 300MM (India)
3. Vornado (VNO)– 1.8B; 2.6B Credit facility
4. Tishman Speyer – 2.2B (total across all funds US, Europe, Brazil, India and China)
5. Walton Street Capital – 1.3B
6. ING Clarion (IGR)– 500M
7. Mack Cali (CLI)– 300M

• Very little activity in the past 2 years – owners are not forced to move assets
• Broken development deals, hotels and condos are very risky but can provide great rewards
• Most view recapitalizations as the best opportunities on a risk adjusted basis

Structured Finance Panel

• Funds that once targeted mezzanine debt positions are focusing on the senior pieces
• Most players are waiting on the sidelines; anticipate cap ex problem for owners who are playing the extending game
• Some firms are becoming more flexible on investment targets – looking at distressed debt, loan to own, or new loan originations
• The government is extending and pretending with banks – quote by Abe Lincoln “You can’t fertilize the field by passing gas over the fence”

Comments

[basehitz]

CRE developer Jeff Neal in this video surveys landscape (literally) of empty buildings and unfinished projects in D.C. A lot of capital at risk here, and this is only one area of the country. He says “2010 CRE looks like an unavoidable bloodbath.”
www.youtube.com/watch?...

2009 Nov 24 09:42 AM

[mr. mann]

<i> “You can’t fertilize the field by passing gas over the fence”</i>

With regard to CRE, can the lot of the arrogant, incompetent wasters-of-other-peopl... (aka "developers"), fart in their own hands then smell it?

2009 Nov 27 05:13 PM

[Joe Stampone]

Thanks for this review. I was in attendance last year and this year, and although it wasn't upbeat at all, this years conference was much more optimistic. I found the final panel of Ross, Mack, Rudin, Holliday to be the most telling. They discussed that the NYC market is, and always will be one of the strongest real estate markets in the world, however nothing is really going to happen for the next 18 months or so.

2009 Dec 06 04:54 PM