Debt Crisis—or Equity?

“I actually think we’re in an equity crisis, not a debt crisis,” declared John Kukral, president of Northwood Investors, speaking on the capital markets session that opened the ULI/Stan Ross Real Estate Trends Conference on Wednesday during the Urban Land Institute’s Fall Meeting. He referred to the lack of equity invested in real estate properties. That lack may become critical as properties come up for recapitalization, with any lender willing to provide new financing insisting on greater levels of equity—which may prove to be in short supply. Kukral pointed to the fact that foreign investors are also having problems. In fact, he referenced one Middle Eastern firm that he works with that is out of money. In addition, ULI senior resident fellow Stephen Blank noted during the end-of-day presentation of this year’s Emerging Trends in Real Estate, the investment survey co-produced by ULI and PricewaterhouseCoopers, pension funds will have to pull back because of the latest rendition of the denominator effect: With their overall allocations down, the percentage allocated to real estate will necessarily have to drop, too.With so little capital, JP Morgan managing director & head of global CMBS Randy Reiff rated the debt markets in their seventh inning and the equity markets not even at bat yet. While capital markets panelists and those that discussed the Emerging Trends results later on generally agreed that few properties are up for sale anyway, with the bid-ask gap only just starting to loosen, Harvey Green, president & CEO of Marcus & Millichap Real Estate Investment Services, told fellow Emerging Trends panelists that his company has tracked more than 14,000 transactions this year in the under $25 million category. Most of them have been the venue of smaller investors, including Baby Boomers seeking positioning for transfer of wealth, but some institutions have also bought the smaller properties.Speakers on both panels predicted a slow return of opportunities over the next few years—“there’s a lot to plow through here in the near term,” pointed out Charles Leitner, managing director & global head of real estate for RREEF—but GE Real Estate president & CEO Ron Pressman won applause from the audience when he admonished, “I’m kind of shocked at how down everybody is.” He pointed to the wealth the industry has created in the past few years and noted that the current pain will lead to a lot of opportunities. “It’s just back to good old-fashioned real estate,” he said. “You’re about to enter a period where real estate still is critically important. … This is your time.”He also noted that while the industry must first face a “very tough double whammy” of the credit crunch and the recession, pension funds are likely to invest in real estate because it stands out favorably among the few asset classes they actually have to invest in.Looking forward, a number of the capital markets panelists and Emerging Trends principal author Jonathan Miller all pointed to REITs as the leading indicator to watch for signs of recovery.For interviews with a number of experts during ULI, including Jonathan Miller and Stephen Blank, click here to access the CPN Radio Extras.