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NEW YORK CITY-A repricing of assets will be necessary to return liquidity to the system, and the pricing change will have to come from the capital markets. So said Richard J. Mack, partner with Apollo Real Estate Advisors, at yesterday¹s breakfast presentation sponsored by the Real Estate Lenders Association and held at Club 101.

“We’re sitting on the sidelines in the equity business, and I think that is the most telling sign” of how Apollo views current market conditions, Mack said. He noted that out of $3.2 trillion of debt outstanding in commercial real estate, 10% is mezzanine and 25% of the mezz debt, or approximately $77.5 billion, will mature each year.

Mack, who’s responsible for new investments and investment management at Apollo, aligned himself with those who believe “things are going to get worse before they get better.” He added, however, that this presents many opportunities for lenders to make prudent loans with equally prudent spreads.

The uncertainty in the market has led to mixed signals in a variety of areas, among them the question of whether the US is headed toward a recession. Mack said he believes it is, but added that he doesn’t think the effects of a recession will translate into substantial increases in the Manhattan office vacancy rate. The last time major financial institutions gave up a lot of space in Manhattan, in the downturn of the late 1980s and early 1990s, they soon came to regret it, he said.

“So I don’t see a huge vacancy rate coming,” said Mack. “But I do see that New York office space is mispriced.” In response to an audience member’s question following his presentation, Mack extended that characterization from the sale of office buildings to the asking rents at many properties. “The rents of $100 to $150 per sf have been achieved in only a very few buildings,” he said, adding that even if landlords post three-figure rents, tenants often negotiate them down.

If the US market is headed for a recession, Mack said, it will recover more quickly than Europe. “Lenders there are completely shut down,” he said. Even in Asia, where national economies are quite strong, there has been some pullback on credit, he added.

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