NEW YORK CITY-David Tobin, principal and co-founder of Mission Capital Advisors, sat down with GlobeSt.com to talk about a wide range of issues--from the state of the economic recovery here in the United States to what types of development deals he currently sees receiving financing. Tobin’s firm, which has advised on more than $35 billion of loan sale and real estate financing transactions, provides a unique vantage point. For instance, he says that lending, not employment numbers, are the chief gauge of progress toward economic recovery and that, by this metric, things aren’t quite as bad as you might think.  

GlobeSt.com: Can you give me your view of the economic recovery? Where do you see things currently and where do you see them going in the future?

Tobin: The recovery from our perspective--and our perspective is really how it relates to the banking sector--is going to be better than the pundits suggest and better than all the very bearish sentiment that’s out there. But it’s still probably not fast enough to have any real effect on growth. By that what I mean to say is banks selling down bad assets is sort of the fastest way to recovery--banks taking the pain. Most knowledgeable folks agree that banks can’t in one fell swoop write down their entire book of business and take that pain internationally--in Asia, Europe and the United States. Things have been attacked quite well by the FDIC, which has balanced bank takeovers and pushing other banks to sell assets with some form of recovery and perhaps a little bit of economic growth. But lending, as we knew it, hasn’t returned for businesses and for consumers, and lending will probably be the thing that leads us out of the doldrums and back into growth mode.

GlobeSt.com: When do you anticipate lending returning? Is that imminent or is that further down the road?

Tobin: Twelve months ago or even six months ago it was imminent. The first six months of 2011 it was actually happening. Things have noticeably tightened up since the middle of the year. Spreads have widened out, bank sentiment has turned rather negative and it’s kind of a chicken and an egg thing. I don’t know if finally getting through some of the pain that was necessary in Europe is going to make banks comfortable lending again or if banks need to start lending again before we get through the pain in Europe. If I had to distill it down, it sort of seems like Europe is going through now what the United States went through from mid-2009 until the end of 2010. We had a lot more bank takeovers, a lot of pain, a lot of write-downs and I think that Europe is just getting to that point right now. One of the challenges in the European banking system is that you have very distinct nationalities that all have very strong opinions as to who is to blame. And in the United States, while it’s a big melting pot, it’s one nationality. So it was a little bit easier for the Fed, Congress and the administration to get their arms around the issue and to get things moving. In Europe there seems to be a lot of cross-border anger that’s hindering progress.

GlobeSt.com In your view what is the outlook for CMBS going forward and do you anticipate an uptick?

Tobin: I think the outlook for that space has been strengthening notwithstanding the fact that there has been a pullback in CMBS lending over the past two or three months. So you have the securities market and you have the whole loans that are underpinning the securities market and the whole loans seem to trade in a slightly more rational fashion. The CMBS market, as evidenced by the CMBX index, sort of over-rallied leading up to the second quarter of this year and sold off very sharply. The underlying market for the distressed loans in those CMBS securitizations has been straightforward, moving right along and liquidating as it should and in reasonable relation to the underlying markets where those assets are located. So you have the very lowest balanced loans in those distressed loans in those securities trading for 30 to 40 cents, you have the medium sized loans trading between 40 and 60 cents and the very biggest loans trading even better than that on the distressed side of those securitizations. You never have outlier prices on individual loans because the value is very apparent and quantifiable. The rally in subordinate CMBS bonds was overdone not because of how the distress loans were trading but because of the valuations investors were putting on the performing loans within those securitizations.

GlobeSt.com: What sectors here in the city are seeing the most distress and where are you seeing the most distress in the region as a whole?

Tobin: It’s sort of hard within New York City to pick out a distressed segment of the marketplace because the market has been so strong, but clearly the highest profile defaults and biggest losses have been taken on middle income and lower middle income multifamily housing. Stuytown and Riverton in northern Manhattan. The trade that investors were making, whereby they would buy rent stabilized complexes and then bet on the destabilization of certain units and the attrition of those units--that was a failed trade and that incurred the biggest losses. That not only occurred on very large middle income, lower middle income housing developments but it occurred on much smaller buildings as well. So that was a bet that investors made in '06 and '05 and early '07 that really didn’t work out on any level. But if you look at how retail, hospitality, multifamily and office have done in New York City and you had to pick a sector which is doing least well I would have to say it’s office. But that’s only because the other three sectors are doing so well. I think retail leasing has been surprisingly strong, multifamily cap rates hover in the 4% or 5% range, which is lowest in the country, and hotels are full and expensive again.

GlobeSt.com: Do you envision an entity such as the Resolution Trust Corp. having a comeback in terms of the need for a standalone entity to liquidate real estate assets?

Tobin: I don’t really see that happening this time around. I think that the loan sale industry has become so advanced and so liquid that the FDIC insofar as it gets down to the end of many of its assisted takeovers--and each of those assisted takeovers typically has a term associated with the guarantees that the FDIC provides on the loan portfolios that are acquired--as they get down to the end of that process, that is going to be three to five years from now, I think that the recovery will have been sufficient enough to take us completely out of the problem and to the extent legacy portfolios still exist, those positions will be 20% or 15% or 30% what they were. The FDIC could certainly direct those banks to do an asset sale--the FDIC has the authority to do that on those assisted takeovers. The RTC was borne out of a different policy approach to the issue, which was to shut down many more banks and take over all the assets. The new policy approach has been, I think, to shut down not even as many banks as before from a percentage perspective and let new banks come in and buy the deposits and the assets and provide insurance and value those assets declining. If we were going to do an RTC we would have done it in 2009 or 2008 and we would have shut down lots of banks and put all the assets into the RTC and then gone on and sold them. We’re pretty far along in fixing things here. Things would really have to get quite bad again for us to need an RTC style system. But stranger things have happened.

GlobeSt.com: In terms of development deals, what types are you seeing financed? Are they stalled sites that are starting back up again or that have been taken over? Or is there a fair amount of new development that is getting financed?

Tobin: I think it’s both. We arranged equity and debt financing on the Verizon building between West 17^th and West 18^th, just west of Seventh Avenue. It was a sale of a building by Verizon--a wedding cake style, art deco high rise building surrounded by very low rise property. We arranged two rounds of equity for that and then a $97 million construction loan, which closed in August of this year. Even after the S&P downgrade I think the perception by big institutional lenders is that New York is as safe a bet as any. So that’s a good example of new development. We also similarly financed the acquisition of a half built condominium complex in Williamsburg at 50 N. First St. This was a property that Valley National Bank had foreclosed on and had gone to market to sell. We helped the acquirer raise additional sponsor equity as well as institutional equity to close the acquisition. We’ve subsequently gone out to raise additional funds to complete the project. It’s a big money center bank that is probably going to lend that construction money at probably a 50% to 60% loan-to-cost but the interest was there both from developers, institutional equity investors and commercial real estate lenders to take on a half built project. From our perspective New York, at least, is firing on all cylinders.