‘Light Around the Bend' for Industry

NEW YORK CITY-Compared to the dark road ahead that confronted the industry following the capital markets collapse in the fall of 2008, today “we see some light around the bend,” said Melissa Farrell, managing director at Prudential Mortgage Capital, at the 2010 International Real Estate Capital Markets Conference here. Farrell and her fellow panelists at Friday’s event, which was co-sponsored by Columbia Business School and Goodwin Procter LLP, charted the progress commercial real estate has made in coming back from the near-paralysis that set in after the weekend of Sept. 15, 2008, but also detailed the world of challenges that still must be overcome.

However, in discussing these challenges, the panelists onstage at the Times Center made it clear that they were not insurmountable. In the debt markets panel moderated by Barclays Capital’s US head of real estate banking, Schecky Schechner, Boston Properties president Douglas Linde raised the specter of the hundreds of billions of dollars in commercial mortgages that will be coming due. Yet he then pointed out, “Not all of the loans that are maturing in the next few years are underwater. It’s a question of how you finance.”

Linde also disputed the widely held perception that a shortage of capital has clamped down on deal flow. “There’s more than enough capital,” he said. The issue is that the various levels in the capital stack haven’t come to grips with the decline in fundamentals. “It’s a value problem.”

In terms of capital sources, Farrell pointed out that Prudential had about $4 billion to deploy this year, adding, “We definitely have an appetite in 2010.” That appetite will be satisfied with loans of $10 million and above, in primary markets, she said.

Patricia Goldstein, president of Emigrant Realty Finance, said that when it comes to banks lending again, “Everybody’s targeting the same kinds of assets.” That means finance for stabilized properties as opposed to the construction loans that were far more prevalent on the 2000s. In response to an audience poll finding that 43% of conference attendees believed “extend and pretend” would be the rule until at least 2011, Goldstein disputed the perception that banks are under no pressure to foreclose.

Ladder Capital’s CEO, Brian Harris, predicted that CMBS as a viable financing mechanism would come back “a lot faster than people think.” He believes it’ll be “a matter of months, not years.” That being said, Harris said that when it comes the commercial market getting back on steady ground, it all comes down to the fundamentals–specifically, job growth. “No government program, no lowering of interest rates, no recapitalization of REITs is going to put people in buildings.”

The equity market panel that followed, moderated by Jonathan Litt, founder and CEO of Land and Buildings Investment Management, looked at the dramatic rebound REITs have staged since the previous Columbia/Goodwin Procter conference in November ’08. “The public companies are teaching the private companies a lesson,” said Steve Coyle, CIO of Global Realty Partners. He noted that much of the $60 billion of equity REITs worldwide have raised in the past year has gone to strengthen their balance sheets by paying down debt.

Although REITs today often have “a balance sheet that is capable of doing some things,” Jeffrey Horowitz, head of America real estate of Bank of America Merrill Lynch, pointed out that they’ve been shy about spending. Some of that hesitancy might stem from the fact that while REITs are better positioned from a balance sheet perspective, their funds from operations could decline in subsequent quarters, said Douglas Weill, founder and managing partner of Hodes Weill & Associates.

REITs’ FFOs aren’t the only thing in decline. “The have-not assets are getting worse,” Coyle said. “REITs are not going to acquire buildings that are 50% vacant.” That creates opportunities for the private side, he added.

The concluding keynote, by Columbia’s Frederic Mishkin, discussed the federal government’s intervention in the economic crisis and what it may mean for the furure. Mishkin, professor banking and financial institutions and a one-time Federal Reserve governor, said the fact the US avoided a depression was due in large measure to such intervention. However, he added, while the bailouts were necessary, “they were very poorly executed.”