After Wall Street’s Wild Weekend, Uncertainty Rules in Capital Markets

Bank of America’s purchase of Merrill Lynch and Lehman Brothers’ filing for bankruptcy protection this weekend is unlikely to thaw the year-old credit freeze-up that has plagued lending for commercial real estate. “This is bad news, of course,” said Lawrence Longua, clinical associate professor at the Schack Institute of Real Estate at New York University. He said that the news adds another layer of uncertainty to the market. “Lehman’s bankruptcy means that there will be $40 billion of real estate that they are going to be unloading. There are no buyers out there, there are only sellers.” “Lehman provided equity, they provided debt, they provided mezzanine debt, they were in every part of the capital stack,” said Eric Anton (pictured), executive managing director of Eastern Consolidated. Anton agreed that uncertainty is continuing to stunt transaction volume. There is a huge amount of equity waiting to be deployed from what Anton said could be 500 hedge funds. “But they’ve promised their investors such high returns,” Anton said. He said that a lack of debt is one obstacle to achieving those returns. “And the days when you could buy a building, and sell it the next year for 30 percent more, are gone,” he said. “Today, you have to work for a living.” He sees a continued move on the part of lenders to back-to-basics underwriting standards. “The focus will be on good sponsorship, good location,” Anton said. Obtaining financing for construction projects will be the most challenging. “These are the riskiest projects, and they will be hurt.” The weekend’s developments will mean that sub-performing real estate loans and assets that may have been sold in one-off transactions will now likely be sold in more of an RTC-type auction, through a third party company or bankruptcy court, said Spencer Garfield, managing director of Hudson Realty Capital. He said that while this weekend may be seen as the trough five or 10 years from now, there is more bad news that will have to work its way through the system. Many regional banks will have to dispose of a significant number of troubled real estate assets, Garfield said. Some banks will have to close their doors, or be acquired, but the disposition of these assets will be required before these banks will start lending again. “Then you’ll see them dip their toe back in the water again, with lending terms that will be very conservative,” Garfield said. A large engine of real estate finance, the CMBS market, is likely to remain sidelined for a while more, Longua said. “I don’t see an uptick in CMBS issuance for the next 12 to 18 months.” Longua noted that securitization and a growing number of publicly traded REITS were supposed to bring greater transparency to commercial real estate, and thus smooth out the real estate cycles. But, in light of these latest developments, that tenet has not proved out, he said. Anton found some similarity to the Enron debacle. “That [Enron] was about corporate greed and theft,” he said. “I don’t say there was theft. But lenders lost sensibility about basic underwriting standards.”