Commercial
real estate bleak as credit crunch hits, say Kellogg experts
But panel,
looking to potential capital 'on the sidelines,' sees some
reason for hope, if not immediate rescue
By
Matt Golosinski
January
24, 2008 -
Sinkhole, or something rather like it. That's how some commercial
real estate experts are regarding their field in light of
current market conditions.
Five Kellogg School alumni shared their consensus view during
a Jan. 23 panel discussion titled, "Pothole or Sinkhole? The
Impact of the Loss of Easy Credit on Commercial Real Estate."
The 90-minute session, held in the school's Donald P. Jacobs
Center, featured real estate veterans who found plenty to
worry about as they surveyed the lending squeeze that has
tightened the availability of capital in recent months.
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Erwin Aulis '82 moderated a Jan. 23 panel discussion at the Kellogg School that assessed the current market for commercial real estate. Photo © Nathan
Mandell |
Panel
moderator Erwin Aulis '82 offered a gloomy assessment. "Sinkhole,"
said Aulis, COO of Northwood Investors LLC. He compared the
current fallout from widespread subprime lending in the United
States to the economic malaise of the early 1990s. "This is
as bad as 1992 or 1993," he declared.
Colleagues agreed, though some modulated their responses while
failing to offer a much sunnier perspective.
"This isn't a speed bump," said Robert Underhill '84, a managing
director of Shorenstein Company who has more than 25 years
of experience in real estate investment. "It's a multi-car
pileup on the interstate, but not a sinkhole." He said that
although the next 12 to 18 months will prove "difficult,"
he already sees the seeds of a possible recovery. "There's
too much capital [currently] sitting on the sidelines" waiting
to be invested, he said. As a result, the real estate market
will likely attract value-seekers.
However, Underhill noted that lending conditions now make
it challenging to raise money for a new fund unless those
involved have résumés loaded with proven success.
Earl Webb '81, CEO of Jones Lang LaSalle's capital markets
group, said he believed economic fundamentals were still sound
but that "the debt market is closed," making it tough to pursue
ventures with any significant risk attached to them. "The
perception of risk has clearly changed," he said, adding that
there has been an underlying risk repricing, with the burden
falling onto those who should carry it. Investors can find
"pretty decent values" in commercial real estate today - senior
housing was one example he indicated - but Webb cautioned
that pricing has yet to reach equilibrium.
Speaking about lax lending conditions and real estate practices
that had prevailed until recently, Webb said these factors
had contributed to easy credit and some imprudent investments.
But this landscape has dramatically shifted to embrace the
rudiments again: "We will have amortization now. There will
be debt service coverage [a performance ratio used as a benchmark].
We will have lenders with new underwriting services."
This return to a more sober approach was welcomed by the panel's
youngest member, Adam Falk '07, managing director for Transwestern
Investment Company. Falk said he "hoped" the market turn was
"just a pothole," but that in any case the economic troubles
were the result of a "broken system" whose malfunction he
attributed to "obvious reasons that people saw coming," including
conditions where investor "greed exceeds fear." (The converse,
he said, is hardly better. When fear exceeds greed, "nothing
gets done.")
In recent years, Falk said, "some really bad ideas and operators
got money; that's just not going to happen anymore." Players
will need a track record to attract capital, said the Kellogg
graduate. "I don't think that's bad. That's very good for
the long-run."
In the short-run, some panelists also saw reason for optimism.
Webb noted that there is more equity in today's market than
he has ever seen in his career dating back more than two decades.
Jeff Johnson '83, principal at Lakeshore Holdings LLC, pointed
to investment opportunities even in a down market.
"There is still great stuff to buy. There are deals out there,"
he said, indicating that investors should review the papers
and look closely at the double-digit dividends still being
paid by some REITS. "Most of the market doesn't want to catch
that falling knife, but if you're a value investor, there
is great opportunity," said Johnson.
The 90-minute discussion was sponsored by the Kellogg School's
Real
Estate Management Program in partnership with the Guthrie
Center for Real Estate Research and the school's Office
of Alumni Relations.
The event began with an attempt to inject a little humor into
an otherwise grim financial context: A slideshow, narrated
by Aulis and Falk, presented a parody of the Dr. Seuss classic
Green Eggs and Ham. In the updated
version - created by Cameron Crise, an American investor
working in London - the disreputable Broker Joe tries to cajole
the narrator into purchasing a variety of dubious financial
products, including collateralized debt obligations (CDOs),
an asset-backed security whose complexity some have implicated
as contributing to the subprime fallout.
But the protagonist resists temptation with the sort of iron
discipline that Webb said is being forced on buyers in today's
market.
And that's good news, he said. |
