Investing, Lending Take Opportunistic Turn

NEW YORK CITY-The next few years may not see investors scooping up bushel baskets of deeply discounted REO properties as they did in the early 1990s, yet a panel of private equity experts Thursday suggested that they’re looking more seriously at opportunistic plays.

“Everybody got so burned by the downturn that they want safety and liquidity,” said Jonathan Gray of Blackstone Real Estate Advisors, during New York University Schack Institute’s 43rd Annual Conference on Capital Markets in Real Estate. Partly because everybody is chasing those same few deals in New York City, Washington, DC and a few other key markets, that means more opportunities in properties that are high-quality yet impaired, said Gray, senior managing director and co-head of real estate at Blackstone. Paul Galiano, Tishman Speyer’s co-head of acquisitions, dispositions, equity capital markets and joint venture transactions, said the current bifurcation between core and value-add opportunities will continue into next year.

Similarly, a panel of lenders, all of whom spoke of their organizations’ conservative underwriting, also expressed a willingness to push the envelope just a little. “We’re starting to look for more opportunities where we can get a little more yield and take a little more risk—but not too much more risk,” said Richard Coppola, managing director and head of commercial mortgage investments at TIAA-CREF.

Deutsche Bank Securities’ John Nacos, managing director and global head of real estate debt, said he now sees value in “unstabilized, broken assets.” However, that comes with higher-priced debt—interest rates north of 10%—along with leverage of no more than 60% to 65%.

That slightly looser lending environment also extends to construction financing: lenders are providing money to build once again. But Michael Higgins, managing director and head of US real estate finance with CIBC World Markets, noted that what’s changed from the peak of the cycle is the greater amount of equity a borrower now needs to put in on a construction project.

These lenders, who also included president David Twardock of Prudential Mortgage Capital Co. and Mark Wilsmann, managing director of real estate portfolio at MetLife, all noted they never got out of the lending business even during the depths of the downturn. That being said, volume is off considerably: Nacos said his firm has put out $3 billion to $4 billion globally thus far in 2010, compared to somewhere between $50 billion and $60 billion in 2006, while Prudential’s $8 billion worth of domestic lending so far this year is a little more than half what it did at the peak.

Conversely, the five private equity leaders at Thursday’s panel each spelled out their investment track records year to date, and moderator John Kukral, president of Northwood Investors, tallied it up at about $9 billion. Whether they’re going to put out comparable sums in 2011 is an open question, though.

For one thing, while the next few years will see hundreds of billions of dollars in annual commercial mortgage maturities, it’s not at all clear that this will lead to a flood of distressed assets, said panelist Neil Bluhm. “The product is coming out much more slowly and in a rational way” compared to the ‘90s, said Bluhm, managing principal of Walton Street Capital.

For another thing, Bluhm said later in the discussion, it’s not certain whether the capital flow will continue. “Most of the money we were talking about earlier, we raised a few years ago,” he pointed out.

William Walton, managing director of the Rockpoint Group, said many big funds are “moving down the risk curve.” He said his investors will continue to invest opportunistically, but will probably reduce the number of fund managers they use.