Investment banks could well continue to resist selling assets at deep enough discounts -- certainly they haven't in any numbers thus far. Investors, for their part, may decide the market has bottomed out before it actually does -- and pay too much for assets that have more risk attached to them than first realized.
That latter scenario is David Schechtman's biggest concern right now. A broker with Eastern Consolidated, he tells GlobeSt.com that it is a question he constantly gets as he shows product in the New York area. "I can tell you people's number one fear is that value still has much further to slide."
Much depends on the location of the asset, he continues. "Outside of New York, the discounts are very deep and the time may finally be ripe for those to go to market. However in the tri-state region there remains a tremendous disconnect between buyers and lenders of non performing loans and assets." Banks that are holding on to these assets are refusing to make the final – and necessary – cuts in price for trading to truly begin, he says.
Some assets are so deep in negative territory it doesn't make sense to acquire them at any price, says Vic Faris, a managing director at the Cleveland-based boutique investment banking firm Western Reserve Partners. "Land loans for residential housing, for example," he tells GlobeSt.com. "Some will never get built – especially in the outer ring suburbs that will mean high commuting costs."
Retail can be another iffy prospect, he says. If a big box retailer pulls out or goes bankrupt, it could result in several other retailers leaving as well, he says.Faris agrees the bid-ask spread is still too wide for much action to develop now -– but like many in the industry he predicts that will change in Q4. "The banks will be forced to start selling these assets then and will come down in price to get at least something for these assets." Another problem that will face these funds as they begin to deploy capital is the lack of "quality" distressed assets, Jim Kelleher, SVP, CIO and director of acquisitions for the New Boston Fund, tells GlobeSt.com. "There are relatively few quality distressed assets that are priced right now at a level that gives an investor a decent return for the work it will have to do to stabilize it."
New Boston Fund doesn't have a dedicated fund for distressed assets; however it does acquire them under its value add funds, in theory at least. Distressed assets in Kelleher's view can range from anything from bad loans, corporate excess properties, broken development deals, vacant properties to partner recaps. Tellingly, Kelleher says that the firm has not found anything that fits with its investment criteria in the last six months. To acquire such a transaction, he says, New Boston would have to feel it can address the project's risk through the firm's vertically integrated approach.
The good news is that some of the issues will be mitigated if the investor is willing to take a long-term view. Projects in Florida and California that have been sidelined due the current economic conditions, Adam Weissburg, partner with the real estate law firm Cox Castle & Nicholson in Los Angeles, tells GlobeSt.com, "ultimately could be very successful -- just not in today's market. The real issue to success is not the project themselves, but the willingness of the owners to 'land bank' for a period of time so that the market comes back. As such, 'quality' will not be the driver to many of these funds' deploying cash, but rather patience."
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
