FRANK COHEN: We’ve certainly seen a pretty significant snap back
in values. They were down something like 40% at the bottom of the
cycle, and we’ve seen maybe half of that come back. But I don’t know
what’s going to happen to values in 2011. If you look at some of the
public companies as an indicator, certainly the office REITs are trading at pretty low cap rates, and we’ve seen quite a recovery in values.
Some of it will certainly be tied to what happens with interest rates.
It’s hard to distinguish between what’s being driven by the capital markets and the fact that there aren’t a lot of alternatives for
fixed-income investors, and what’s driven by fundamentals. There
will be a race between fundamentals coming back and interest rates
returning to a more normal level, and how it plays out will probably
tie into 2011 performance.
WALSH: Like others, we’ve been bidding on deals all year long, and
while we won a couple, we lost a number of
them. There was a lot of positive leverage
because interest rates were so low. Whereas we
were trying to invest all equity, others were able
to come in and get extremely low debt, particularly in the multifamily sector, where they could
get 3.5% interest rates. We were losing a lot of
deals relative to that. But do we think cap rates
will go up as a result of interest rates increasing? There’s a good possibility they will.
KEITH A. GOLLENBERG: I’m in Bob’s
camp. Total bond maturities between now
and the end of 2012 are anywhere from $1.1
trillion to $1.6 trillion. And if you believe
Moody’s PPI, it’s down 30% to 45% from the
peak of October 2007. Those of us who have
been in the lending business a long time
know the average loan then was around 80%,
and that excludes core, which was modest or
zero. What was your 20% LTV transaction?
WALSH: In our core fund, it’s probably 30%.
In our core-plus fund, where we had 60%
leverage before the downturn, we went up to
the 80%-to-90% range. That’s since dipped as
values have come back a bit, and we got rid of
some assets. We’re probably around 65% on a
core-plus deal now.
GOLLENBERG: So if we assume $1.5 trillion
coming due, that’s a lot of distress. We think
the capital markets can bail us out a bit but the
interest rate remains a question. Right now
Fed Reserve chairman Ben Bernanke is keeping all fixed-income alternatives. It’s telling
everybody to take risk. Where will it settle out?
I certainly don’t know. But if you take a cap
rate from 5% to 7%, that’s a 30%-plus decrease
in value. To make up for that increase operationally, you’ve got to take NOI up by 40% or
so. And from 2001 to 2007, NOI across all
property types remained flat, while property
values went up about 60%.
So there’s potentially a lot of distress. Some
markets like Washington, DC and Midtown
New York are positive, as are core funds and
REITs that were very low levered. But outside
of those two camps—that’s where the distress
lies. You have to be careful to differentiate
between the haves and the have-nots. That’s a
clear line that you can see in the markets, par-
ticularly in the banks. There are now around 900 banks with assets
totaling $450 billion on the watch list. So there is a lot of distress
out there. How you access it is going to be very different than it was
in the RTC days, when there was one very clear path.
MICHAEL G. DESIATO: Will we see another shoe drop from
a valuation standpoint as a result of increasing interest
rates or more debt maturities?
GOLLENBERG: I think it’s just debt maturities. If values stay
where they are today, there’s quite a few of that $1.5 trillion that
will not be refinanced without new equity.
COHEN: I think the market has been pretty resilient in terms of
coming up with solutions, whether it is extend-and-pretend or
additional capital put in where assets trade hands. Thus far, we
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