Opportunities Knock, but Change Must Come
- Jun 08, 2012
Americans like the new, but they don’t like to give new products a chance to work through growing pains, warned economist Hugh Kelly during yesterday’s Distressed Debt & Assets Symposium, produced by Deloitte in partnership with New York University’s Schack Institute of Real Estate. For that reason, when the economy tanked and banks’ incautious lending practices caught up with them during the last recession, their response was to reject CMBS as simply too risky—an immature reaction to an immature product, said Kelly, who is an associate professor with Schack.
The keynote speaker at the conference, which took place in the New York Athletic Club in Midtown Manhattan, Kelly said he believes it’s possible to improve the picture, but it’s going to require a commitment to change. In fact, it will require massive change and massive capital. If we keep doing what we’ve been doing, things are not going to be pretty.
Kelly noted the U.S. market has been marked by about $170 billion worth of distress, according to Real Capital Analytics Inc. figures, with about half still to be dealt with. There are also a range of opportunities in Europe, depending on the country.
Those opportunities, in fact, are better than anything available through the U.S. government, pointed out Bruce Richards, CEO of Marathon Asset Management, during a fireside chat that followed with Ira Jersey, director of the U.S. Interest Rate Strategy team at Credit Suisse and Pimm Fox, anchor of Bloomberg Television’s Taking Stock program as moderator. With rates so low in the United States and the federal funds rate already at zero, there’s a lot of price risk because rates really can’t drop further. Europe’s lack of growth (about 1.6 percent GDP on average last year), with half of the Eurozone centers in recession and what he estimated to be a 35 percent chance of the European Union disintegrating, makes for a rough picture across the Atlantic, as well. But he remains confident EU cities will eventually be able to pull themselves together.
As for the U.S. CMBS market, delinquencies increased in May, topping 10 percent for the first time in a long time, and there is $1.7 trillion maturing in the next five years, with 60 percent estimated to be underwater right now. However, volume remains much lower than it was in 2007, with $60 billion currently delinquent, $80 billion in special servicing and $30 billion to $40 billion in new transactions, versus more than $200 billion five years ago, noted Steven Bandolik, director of real estate services for Deloitte Financial Advisory Services L.L.P., who moderated the lenders panel.
What does all this mean for the market? As with investment opportunities, the real issue is proceeds, noted Capital Trust CEO Steve Plavin. Lenders will grow a little more aggressive, he said, and there will be more need for mezzanine financing to fill the gap. The challenge will be for the borrower to bring in enough income to top financing fees.
Meanwhile, lenders are still waiting for the floating-rate market to return. We do need more liquidity in the floating-rate market, declared Plavin, who noted its importance for transitional and distressed assets.