Catching Up on the Real Estate Market

As the real estate wall of debt continues to impose itself on the residential and commercial markets, the need for workout professionals is reaching new highs. Firms started by former Blackrock, Lehman Brothers and Bear Stearns professionals are experiencing substantial growth in head count. An estimated $300 billion sits on the sidelines of real estate private equity as the market looks upon $3.6 trillion of leverage loans made since 2000 and $430 billion maturing in the next 3 years.

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The IMN’s US Real Estate Opportunity & Private Fund Investing Forum ran several panels on real estate investing. Investors were excited about many investment bargains they were seeing but were wondering about when the market would hit bottom. Some of the discussion was about investing in primary markets and not tertiary markets where there seemed little opportunity for strong real estate returns. There is the feeling that there is a glut of malls, residences and commercial office space. Some people are expecting national office rate vacancies to approach 25% as they are already at 15% in many parts of the country.

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Ongoing debate on REITs and whether they are a good investment right now are dependent on the success of the PPIP programs which provide more liquidity into the markets. REITs are being challenged by asset deflation, diminishing cash flow due to the business downturn and widening financing spreads. Another aspect is that Mezz debt or unsecured debt is at 10 or 12% or higher.

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Zero Hedge also looks at the REIT environment and does not see positive news outside of PPIP. "Many REITs that have launched tender offers have IDRs in the ‘BBB’ rating category. Fitch’s ratings for REITs that have launched tender offers range widely, from Public Storage (which has an IDR of ‘A’ by Fitch, with a Stable Rating Outlook) to Centro NP LLC (which has an IDR of ‘CCC’ by Fitch, with a Negative Rating Outlook)"

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