“Well, let’s replace the CMBS market” when you don’t know
where values are. You don’t know what loan to value really
means, because you don’t have the “V” part figured out. And
you don’t know what coverage is, because you’re not sure
what the cash flow is, although cash flows are easier to figure
out than values right now. And that’s part of the good news
too, the economy notwithstanding.
You’ve got to work through the value side of it, and then
those pools of capital will start to reform around the opportunity. And whether it’s the CMBS market or what—I’m not
sure we’ll ever use the term again.
BARCLAY: There are three areas that have been touched on
when it comes to that question, and if you look at each one,
you get a picture.
If you look at valuation, we’re going to get there. There’s
tremendous liquidity pressure among the open-end funds
and the publicly traded companies. Some of the best names
in the universe of publicly traded companies have been
crushed lately. So we’re going to get to a value proposition
reasonably soon. Why?
Because we have to. So simple real estate is going to
trade, and cap rates are
going to rise by 200 to 300
basis points.
The part of the market
that’s going to be much
harder to clear is the debt.
Typically, you think of debt
clearing before equity. Here,
we have a tremendous pile
of very complicated assets—
CMBS and the sorts of assets
built on them. Teasing them
apart, and getting over the
issues of whether special servicers are going to be incen-tivized to do the right things
or the wrong things—that’s
going to be a big mess.
There’s going to be an industry of people trying to figure out how to disentangle a lot of
the complex structures.
The third piece is who’s in the industry. There has already
been a weeding out of some of the marginal players. But
unlike the early ’90s, the remaining players are very strong.
Most of the managements have been through this before and
are going to figure it out. So I think if you look at real estate
values and companies, I think we’re going to get through it
reasonably well. Not quickly, but well. The conundrum for
me is figuring out all that debt. It’s going to take real
resources to do that.
people out there that are just not sure what to do. And there
are people that want to take some risk and get paid for it, but
they are having a hard time defining what that means. And I
think, again, we will get back to risk-adjusted analysis around
opportunities, but there is a good chance that this market is
going to overshoot on the downside, just like it overshot on
the upside. But there has got to be a little more clarity into
what’s going on before people start taking some risk.
There are clearly opportunities out there that are pretty
amazing—when you look at what’s happened to public company valuations and some very good companies that own very
good assets. You can do a lot there if you’re willing to issue
debt to help recapitalize them, and you’re going to get paid
pretty handsomely for it. But what’s the right number?
PUMPER: The conventional wisdom is that redemp-
tions are up. Since there’s a perception that values are
going to go down in the next 12 to 18 months, does it
make sense to take out some of your assets now?
BARCLAY: I don’t know the
distinction between stress and
distress—neither one feels
terribly good to me. But if the
question is whether redemptions are up, I think they’re
down, because just about
everybody’s closed. I think all
the open-end funds are looking across their portfolios and
they’re struggling with the
notion of whether to sell the
dogs or the great ones. What’s
the discount on them, and
which can you live with the
most? They’ll probably do
some variation of the two. I
think we’re going to see a lot
of that, and that’s really
behind my confidence that
pricing’s going to start to
clear, because those funds do need to sell something.
“We’re prepared—
you have to be—
for just about every
form of NOI to
go down.”
Jeffrey A. Barclay
ING Clarion Partners
GARBUTT: Assets are going to sell, but it isn’t going to be
any sort of watershed event. If any of us are jumping into the
market, we want a deal. We want to see how much distress
there is. We’re going to be testing that. We’re going to go
through this whole bid-ask situation for a while, where people will pull assets back off the market to find out where it is.
The lack of credit is just going to slow it down. We’ve got to
get credit back in the market to make this thing work.
MICHAEL G. DESIATO: So, how do you make money
in this market?
LEITNER: The way to make money in today’s market is to
have some. And that gets back to the key here—how do you
unlock capital, if you have some, and move it into opportunities to help with the liquidity issue?
I do believe things will start to clarify. There are just a lot of
MCNALLY: The liquidity crisis is so serious that none of the managements want to do anything to endanger their funds. The clients and consultants actually understand this and are supportive
of that. You won’t see much in the way of redemptions until the
financing and sales markets are functioning better. But you will
see more transactions, since we all have assets we need to get out
of our queue. Come the fall, if you haven’t sold anything, you’ll
have some explaining to do. I think fund managers will cut their
prices to clear and take their licks, so you’ll see more transactions, and then you’ll begin to see some redemption activity.
