EnTrust Realty's Clark

GlobeSt.com: Everyone thought there was going to be a fire sale of properties, as in past down cycles. What happened?

Clark: It's a huge category of distress, and it seems to be growing. But it seems the number of distressed transactions, the expected tsunami, just still seems to be just a trickle. On the investment side that's frustrating for a lot of investors. On the lending side we are largely focused on assisting them through foreclosure, but we're seeing a preponderance of work-outs rather than foreclosure, especially when the borrower is legitimate and has a viable plan for property, even though it may relatively underwater. Everyone is just realizing that foreclosure is bad for everyone, and lenders just don't want to take a full hit. The theme now is when in doubt, workout.

GlobeSt.com: Is the bubble going to burst?

Clark: It's not going to happen at one time, it will be a prolonged process of recovery, distress will come in dribs and drabs. One thing you have to look for with the banks is the burnoff of the interest reserves, typically it takes 24 months. A lot of the deals from early 2007 and early '08, those interest reserves are getting depleted, and the loans have to service themselves through the property. You're going to start to see some of the fractures in a number of deals where lenders are going to have to make tough decisions.

GlobeSt.com: What's the availability of capital to refinance these deals?

Clark: We're in the market on a couple of things, insurance firms are back looking at a couple things, they are out aggressively. However, values have dropped 40% from where they were before, somewhere there's a loss of value and someone has to take a hit. This is going to become very obvious in the next two to three years.

GlobeSt.com: What's going through lenders' heads?

Clark: There are some properties that are just bad deals, inferior assets that will never hunt. Then there are those that are selling at a discount. Then there are deals that are good assets that are just in a tough market, and given a market recovery they should perform. Those are deals where lenders should try to restructure the loan, and possibly even put money back into the property to get more money of it down the road. The Fed has been flexible, giving them time to work things out.A good number of these loans have been given out for properties where the companies purchased the asset as part of the business. The lender has recourse, but the asset is critical to the operation of the company. That's another reason why the actual unwinding of distress has been slower.One situation that is working is we're seeing instances where investors are providing rescue capital to meet loan shortfalls. You have a zombie building where reserves are gone and it's underwater, by an investor bringing in the rescue capital enough value is added to sustain the property and the lender gets more out of the deal when it's due.

GlobeSt.com: What about the real estate experts who make transactions their living?

Clark: It's tough for real estate experts right now, they like to get deals done. You look at the reality…but you are seeing some deals. In Chicago, it's going to be tough for awhile, we've suffered job losses higher than the national average. I don't see any near term change in fundamentals. There's been challenges in all major markets, particular in the office product, and I don't think we've hit bottom. A number of tenants will downsize or leave and put upward pressure on vacancy. The good news is that there is no new supply, though absorption remains pretty sparse. Chicago is a 24-hour city, maybe the multifamily side is what leads us out.

GlobeSt.com: Why form an asset management business right now?

Clark: Well, there's certainly a lot of competition, everyone in the transaction business has put out a distressed flag right now. We have been doing this for eight years. We've been in business for 30 years, we've seen down-cycles, though not of this magnitude. There's a whole generation of bankers and investors who haven't seen this before. It's ironic that people like us have been around a long time are now valued for our judgment and experience instead of knowing how to do the new recent deal structure. Gray hair is worth a little more today.