Warning ahead

2/16/2010 - The dust may be settling after the global financial meltdown, but real estate leaders are still worried about what lies ahead.

Alumni Panel Discussion

Delinquency on commercial mortgage-backed securities and other commercial real estate loans is a concern for the real estate industry. It is predicted that most of these delinquencies will peak in three to four years, and lenders are trying to stall foreclosures by extending these loans, despite rising mortgage default rates.

Commercial lenders are “kicking the can down the road” to what could amount to another financial crisis in the real estate industry, said ProLogis CFO William Sullivan ’83, one of the speakers Feb. 4 during the Kellogg School’s third annual Distinguished Alumni Panel.

“There is not a dramatic crisis today, but there is also not tremendous opportunity,” said Sullivan, who mentioned that people did make money during the crisis by buying bonds and land at cheap prices. “The year 2012 could be a tough year because of the gobs of debt out there.”

Moderator Douglas Harmon ’91 probed the three panelists on a variety of real estate topics, including capitalization rates, valuation, capital flows, transactions from the borrower’s and lender’s perspectives, and regional opportunities. Harmon is the managing director and co-head of loan and high-yield markets at The Royal Bank of Scotland.

All the panelists agreed that the last two years have been the most challenging in their years in real estate. Even the traditional rule of diversifying one’s portfolio did not prevent some companies from suffering severely.

“The biggest shock was that it was Armageddon, it went worldwide immediately,” Sullivan said. “This was an extraordinary event.”

But some firms are taking advantage of the crisis and investing in distressed transactions, including fulcrum securities, said C. MacLaine Kenan ’91, executive director of Arcapita Inc. Some of these transactions are “very crafty,” but also quite risky because they allow investors to buy securities to control an asset, rather than purchase the asset itself, Kenan said.

The crisis also allowed new entrants into the real estate market because major players, such as endowments, aren’t invested as deeply due to the severe losses they suffered in the crisis, said Robert Weaver ’91, managing director at Morgan Stanley Real Estate.

“Capital is flowing, but just from different people and different places,” Weaver said.

Sullivan said the lesson he learned from the financial crisis was simple.

“Get rid of debt,” Sullivan said. “People thrive on it but at the end of the day, it can come back and haunt you.”

The panel discussion was sponsored by the Kellogg Real Estate Management Program, the Guthrie Center for Real Estate Research and the Office of Alumni Relations.