The Birds Come Back -- Before Spring Arrives

Since the late 1990s, opportunity-vulture fund investors have had slim pickings in the U.S. Core and value add funds crowded them out in relatively distress-free markets with ample capital flows pushing up prices in frenzied bidding. Opportunity funds, managed by big investment banks and global financial giants, turned tail, targeting emerging Asian markets and Europe where higher risk development projects could score outsized returns.

Well, the birds are back, circling in the sky, waiting for action. We have talked about problems surfacing among recent buyers who overpaid and overleveraged. Near-term rents won't cover debt service for many of these deals and many borrowers who counted on refinancing on more favorable terms come to terms with the capital crunch. Some small REITs struggle with lower share prices, public company costs, and deteriorating markets. Homebuilders sell inventoried land at cents on the dollar, trying to hang on -- no one anticipates demand to pick up for new housing anytime soon. Condo projects crater in Florida and southern California. And who knows what will happen to all those loosely underwritten loans in all those recent vintage CMBS and CDOs?

Ironically, several major fund managers launch money-raising for new opportunity vehicles just as problems surface in their core and value add funds. Well, they overpaid and overleveraged too, trying to push out all the money investors were pouring into their kitties during the frantic 2004-2007 binge. Of course, don't be surprised to see familiar players joining forces or buying from one another as they lick wounds in the decline.  Just as all their trading with each other helped escalate prices on the way up, they will look to take advantage of each other on the way down, and probably temper the downside slide.   

© Miller Ryan LLC 2008