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Todd Sullivan
Todd Sullivan
Articles (5983) 

Notes From NYU CRE Capital Markets

November 24, 2009

Courtesy of some CRE Analyst readers….

General themes

  • Unlike most other recessions, we are in a “demand” recession – when the economy recovers, absorption should occur relatively quickly; however at 30% lower rents
  • Full buildings will have debt in excess of value, but very little motivation for owners to sell – deleveraging is inevitable
  • Result – fewer foreclosures; most owners will seek new infusion of capital with heavy dilution to existing equity (“Hope certificates”)
  • Current owners are unlikely to realize much value
  • Portfolio lenders such as pension funds/life companies are lending cautiously at low LTVs – 50-60%
  • 2010-2012 – an estimated $1.3 to 1.8 trillion of mortgage debt is expected to mature; where will the debt come from?

Sam Zell – Keynote Speaker

  • In an era of extend and pretend – low interest rate environment keeping loans current
  • Predicts low interest rates in the foreseeable future (18-36 months)
  • Necessity is mother of invention – formation of REIT market in early 90s due to complete lack of capital (Equity Residential – 100% private ownership at 90% leverage; ended up owning 20% of company that was 40% leveraged)
  • Many private firms will seek capital from the public market
  • Does not see grave dancing opportunities except for the hotel sector
  • Back then it was “Stay alive until ‘95; today it is come clean by ‘13”
  • One possible scenario for banks to come clean – banks are enjoying extraordinary earnings (7-8% margins) which can be used to offset the hit on impaired assets

Equity panel

  • It is extremely difficult to raise new capital in the current environment
  • Many investment shops have raised significant amounts of capital in 2008 and have deployed very little since then
  1. Westbrook – 2.8B
  2. AREA – 2B (US), 1B (Europe), 300MM (India)
  3. Vornado – 1.8B; 2.6B Credit facility
  4. Tishman Speyer – 2.2B (total across all funds US, Europe, Brazil, India and China)
  5. Walton Street Capital – 1.3B
  6. ING Clarion – 500M
  7. Mack Cali – 300M
  • Very little activity in the past 2 years – owners are not forced to move assets
  • Broken development deals, hotels and condos are very risky but can provide great rewards
  • Most view recapitalizations as the best opportunities on a risk adjusted basis

Structured Finance Panel

  • Funds that once targeted mezz positions are focusing on the senior pieces
  • Most players are waiting on the sidelines; anticipate cap ex problem for owners who are playing the extending game
  • Some firms are becoming more flexible on investment targets – looking at distressed debt, loan to own, or new loan originations
  • The government is extending and pretending with banks – quote by Abe Lincoln “You can’t fertilize the field by passing gas over the fence”

Todd Sullivan


Editor: Here is a video from CNBC discussing CRE, with Harvey Green, Marcus & Millichap president & CEO and CNBC's Matt Nesto.:

About the author:

Todd Sullivan
Todd Sullivan's - ValuePlays: http://valueplays.blogspot.com

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