Various people in the litigation business have begun to tell me that real estate litigation and bankruptcy has fallen off the cliff in the past few weeks. It appears that servicers have decided that either things are better so let’s kick the can again and wait longer for things to improve. More rescue capital is available so deals are being cut. There is a substantial amount of fund capital available to buy distressed debt so servicers are selling more loans which are then getting worked out. Servicers have realized that if they get too aggressive with foreclosures their fee income drops and their jobs go away. I expect the reality is a combination of all of these things. The result is litigation for foreclosures and loan defaults has declined precipitously.
I expect this will continue to be the case for several months. However, the economy is simultaneously going into a major slowdown. Almost nobody is going to be hiring anyone for the next few months. The Business Roundtable met about 10 days ago and there was near unanimous agreement that the situation around the world is so uncertain, and there is such lack of any leadership out of Washington, that hiring and investing would be irresponsible right now and probably through at least early next year. It is clear that unemployment is about to increase. GDP may be slowing even more. The Chicago PMI is negative for the first time since 2009. Durable goods orders fell off the cliff. Consumer spending is flat lined not counting price increases to food and gas. Europe is not solving its critical problems, China is slowing markedly, the prospect for growth worldwide is negative. Hotel revpar had no growth last week in the US. The situation in the Mideast, and especially Egypt is going in the very wrong direction and there will be something military happen in Iran in the next 6 months.
While it is expected that a lot more flight capital will arrive in the US over the next few months, the combination of all of the above is going to cause a lot of investment to cease or be deferred. Investors will continue to want to buy good US real estate as a place to hide and make a reasonable return cash on cash, but there is now too much competition for the good assets so transaction volume may stall.
The point is, things are going to get a lot worse again and very soon. Projections of rent and value increases will also stall. Hotels will suffer declines in revpar. Office occupancy will stall. New development will remain stalled. Some tenants will face increased financial difficulty. All of that is going to lead to more distress in 2013 by spring. More assets that held on through extend and pretend will find that things did not improve as we all hoped and that the string has finally run out. The distressed business will pick up again by spring of 2013. Even if Romney is elected, while there may be some optimism that things will get a lot better, he is not able to change things that fast. Too much is built into the system to turn it around in a short period. Europe is unaffected by the who is the US president. China is unaffected economically and if Romney wins there might be a trade war. Iran is not stopping building the bomb unless Romney really threatens military action and the sanctions start to affect the mullahs somehow.
2013 is not going to be pretty and the distressed market is very likely to ramp back up by spring.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
