While the long-anticipated tidal wave of opportunities in distress has so far been a trickle as debt holders have shown themselves willing to do workouts, "there's some evidence that next year will be a different story," said Michael Buckley, director of the asset repositioning and turn around strategies certificate program at the University of Texas at Arlington. Buckley and other experts convened for a recent GlobeSt.com webinar made the point that we ain't seen nothin' yet. The webinar was entitled: So You Still Want to Play in Distress.
Although the commercial real estate sector as a whole is gradually recovering from the 2008 capital markets implosion, "The real downturn hasn't yet occurred" in terms of distress coming onto the market, observed John D'Amico, president-elect of the Commercial Real Estate Finance Council.
Approximately $1.2 trillion in commercial real estate loans will come due in the next few years amid a still-shaky recovery in fundamentals, D'Amico pointed out. "That tells me that we still have a huge hump to get over" and assets will become available as a result, he added.
It's not certain that the availability will manifest itself in a way familiar to veterans of the early 1990s downturn, though. Unlike the RTC-driven bulk sales of last time, "a tremendous amount of resolution is taking place at the asset level," commented Stacey Berger, EVP at Midland Loan Services. However, he too predicted that we'll continue to see an acceleration of assets into the market.
This shift in circumstances may compel investors to rethink their criteria, noted the discussion's moderator, Sule Aygoren Carranza, editor in chief of REAL ESTATE FORUM and multifamily editor for GlobeSt. com. To that end, Berger noted that there have been opportunities lately in recapitalizing borrowers.
And while Marathon Asset Management's Ron Bernstein recalled that previously "we were of the belief that there would be more deal flow," he charted the opportunities his company has been finding across the distressed landscape. Marathon has been originating new loans by buying old ones and refinancing them, as well as acquiring distressed notes with the ultimate goal of controlling the real estate, said Bernstein, senior managing director and portfolio manager at Marathon.
He noted that core assets have been in "absolutely crazy demand" and financing is available for these deals. Bernstein wondered, though, whether the supply-demand gap on these assets would eventually lead to a pricing bubble.
Other topics in the hour-long discussion included the challenges of restructuring and the kinds of opportunities that FDIC's bank closings will present. "Restructuring is not just for the spreadsheet jockeys," Buckley commented, while Bernstein pointed out that just because a restructuring is in progress doesn't mean the loan will leave the special servicing rolls. As for FDIC opportunities, Buckley noted that the volume of bank takeovers by the agency thus far in 2010 has been running at twice that of last year.
As CMBS loans from the market's previous peak continue to go into special servicing, a securitization revival has gotten under way, widely referred to as CMBS 2.0. However, Berger expressed skepticism that the revival translates into a next-generation model of CMBS. "We're a lot closer to 1.2 or 1.3 than 2.0, based on the transactions we've seen," Berger said. Thus far, those deals have suggested a return to the type of securitizations seen in the late 1990s, with an emphasis on smaller assets in secondary and tertiary markets. One improvement seen with next-gen CMBS has been the transparency of investor reporting packages, D'Amico commented. "The emphasis will be on disclosure," he said.
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