adjusted returns. The question is whether they will be able to
increase their allocations as we go into the second half. My feeling is it will be a fairly robust year for private market lenders.
That’s partly because the $200-billion CMBS monster is out of
the market.
DESIATO: What’s going to happen with CMBS? What is
it going to look like when the market does come back?
McINTYRE: CMBS is a technology that is very good and solid as
a financial tool. The players involved—the originators, the rating
agencies and the B-piece buyers—have to recalibrate how they
do business. Investors have to come back to the table and buy
into those recalibrations, and then CMBS will probably get back
to being between a $30-billion and $100-billion business. But at
$200 billion, it was tapping into pools of capital that aren’t available long term for real estate.
“It’s really about
getting back to basics:
analyzing how the
economy is affecting
particular markets
and product types as
you go forward.”
ROD VOGEL
PRINCIPAL REAL ESTATE
INVESTORS
CLARK: Most investors in CMBS, including us, have difficulty
doing fundamental underwriting. Until somebody can figure out
how to make it more transparent, so that people know what
they’re buying and can make their own judgments, that market
is going to have trouble regenerating any level of activity.
DESIATO: What about the equity side of the business?
MICHAEL P. ZAMMITTI: The biggest problem this year is transaction activity. Sellers are afraid to sell and buyers are afraid to
buy. Current pricing is down 15%, maybe even 20%, for class A
assets with B and C product well below that. When those types
of data points come in, sellers, including us, pull back on deals.
Meanwhile buyers are looking at assets, trying to pick them off
at bargain prices. When the expectations of those two groups
don’t match up, there’s little to no activity.
DUNCAN: I was talking to a couple of the national brokerage
firms, and even when a seller lists a property, the closure rate is
something like 40% to 50%. There is still a significant difference
between sellers’ and buyers’ expectations. That said, there is a
tremendous amount of equity, both foreign and domestic, that
needs to be placed into real estate either through funds or separate account arrangements.
JOHN GERBER: We started selling off our portfolio about a year
ago. Early on, we chose those properties we felt could sell at
strong market values. We also packaged a number of our assets
together and marketed them at a fixed price. The timing was
favorable to us and they sold fairly quickly.
We are noticing more properties come on the market with
“The expectation
was that we’d have
borrowers knocking
down our door trying
to get debt money.”
DAVID D. CLARK
NORTHWESTERN MUTUAL LIFE
fixed prices, which means sellers are pricing a little lower to
quickly catch a sale in a down environment. This shows the
beginning of the change from a sellers’ to a buyers’ market.
VOGEL: The thing that needs to happen is that more sellers have
to be forced to sell in order to reduce the bid-ask spread that currently exists. A fair amount of sellers are either in denial of
where prices are or they’re just not willing to accept those prices.
To the extent that they’re not highly leveraged, they can probably hold on to the assets and wait the market out.
The market will probably generate $150 billion worth of
sales this year, which will seem dramatically slow compared to
last year when more than $500 billion closed in the US. But in
a normal year, $200 billion to $250 billion is a sustainable
transaction flow.
PUMPER: Is there a perception that we haven’t bottomed out yet and there’s going to be more stress on
the system coming during the latter part of this year?
VOGEL: A lot of investors don’t believe we have seen the bottom of the market yet. Many of us track NCREIF and we
haven’t seen, at least in the open fund index, a dramatic write-
“The players involved
in CMBS—originators,
rating agencies and
B-piece buyers—have
to recalibrate how they
do business.”
KEN MCINTYRE
METLIFE
down in property values. Last year alone in that index there
was a 10% appreciation component. You could easily argue
for a 10% depreciation in capital values this year, and then
you’re probably getting closer to fair value for private market
equity real estate. We don’t see it quite as grim as Mike with
the 20% write-down but, certainly, we could see 10%. It hasn’t
happened yet. Investors are waiting on the sidelines to see
those write-downs come to fruition, especially in this slowing
economy.
