CEOs Assess Capital Markets’ Ups, Downs at PREA Meeting

How tough will it get for the real estate capital markets before it gets better? That was the question top executives tried to answer yesterday afternoon at the Pension Real Estate Association’s spring conference in Boston. As a measure of the intense interest in the issue, the event drew close to 700 real estate finance professionals from around the country—a record turnout for a PREA event, according to the association’s leaders. For the moment, at least, the outlook is not pretty. “I think the capital markets’ pain is going to take longer to heal than people realize,” said Jonathan Gray, senior managing director and co-head of the real estate group for The Blackstone Group L.P. A little more than a year ago, Blackstone engineered the largest-ever private buyout of a public company when it acquired Equity Office Properties. A big part of the problem is the distress on the senior tranches of securitized mortgages; banks are unable to sell several hundred billion dollars’ worth of CMBS paper, Gray noted. As a result of uncertainty in the capital markets, real estate lending has taken a “back to the future” turn. In some ways, the market looks a lot like it did a decade ago, observed Dean Adler, CEO & co-founder of Lubert-Adler Partners L.P. “We’re back in the real estate business again. The sheriff’s back in town,” Adler said. Once again, capital structures typically consist of at least 30 percent equity. Meanwhile, today’s conditions again favor local operators who understand their markets and are dedicated to adding value to their assets, he argued. One silver lining for commercial real estate in this climate is fundamentals. This contrasts sharply with the slump of the early 1990s. “There was no pension fund we could convince from 1990 to 1995 to invest in real estate,” recalled J. Bruce Flatt, managing partner for Brookfield Asset Management Inc. He characterized global fundamentals today as “extremely solid,” particularly in the office and retail sectors.Neil Bluhm, principal with Walton Street Capital L.L.C., explained that today’s commercial market in the United States is largely free of the massive vacancy and overbuilding that dogged the market for several years in the 1990s. “I think this is a great time to have capital available, whether it’s in your pocket or (our) pocket,” Bluhm said. Nevertheless, the current situation presents many pitfalls. According to Adler, some developers may want to take what he called the “irresponsible” step of moving forward with chancy projects in this uncertain time. Those sponsors, he explained, may think that they will get a jump on the competition. Adler’s assessment: “That’s lunacy.”