Real estate values in the Westchester-Fairfield commercial office market could drop from 5 percent to as much as 25 percent and retail properties diminish as much or more before the credit market rebounds from the economic downturn, a panel of industry experts predicted last week at an Urban Land Institute capital markets program.
Foreign institutional lenders and equity investors will emerge as alternative sources of capital in what Credit Suisse managing director Adam L. Raboy called “a debt calamity, a debt liquidity freeze.” Some community banks, dragged down by real estate loans in their portfolios, surely will go under or be taken over by other institutions, the bankers and investment managers agreed.
“The whole system is leveraged out of whack,” said Raboy, moderator of the breakfast program at the Hilton Rye Town in Rye, N.Y. “That”™s why we have a systemic problem rather than a real estate problem. That”™s why it”™s going to take us longer to get out of the bubble.”
Tracking “deal flow” at Old Hill Partners Inc., a fixed-income hedge fund in Darien, “What we”™re seeing, a lot of deals are just people trying to save their equity,” said hedge fund partner Travis Pauley. “Liquidity should be a four-letter word these days.”
The securitization market for commercial real estate loans “has gone away, maybe never to be seen again,” Pauley said. To fill that void, “Foreign money will be flowing into this country,” he said. “I think it”™s going to be in very, very sophisticated structures in terms of what the investment is going to look like.”
With conventional financing for new construction shut off, Pauley said some residential and condominium developers already have turned to foreign sources as senior lenders. “It”™s a completely different world, and some of those foreign lenders are untested,” he said. “It”™s their second or third deal in the U.S. And the developers are going to them.”
In the metropolitan area, federally regulated banks, too, could fill the lending void with traditional on-the-books loans, experts noted. Commercial bankers “have been really waiting for the tide to turn for quite some time,” said William G. Lashbrook III, senior vice president at PNC Real Estate Finance in East Brunswick, N.J.
Still, he said, “There is not enough capital in the commercial banking system to absorb all of the demand for real estate debt that exists in the country today. The commercial banks can”™t do it alone.”
The panelists agreed the repercussions from Wall Street”™s credit crisis have yet to be felt throughout the economy ”“ that, as Raboy said, “the centipede still has a couple more shoes to drop.”
“I think the repercussions are huge,” said Lashbrook, who compared the economic climate this year to 1989, when the commercial real estate sector was hit hard in a credit-squeezed economy. People just entering the labor market especially will suffer, he said. “On a compound basis, I think it will be more dramatic than what we saw last time.”
Jeffrey G. Dishner, senior managing director and chief operations officer at Starwood Capital Group in Greenwich, said investment opportunity in 2009 will be in trading paper on debt rather than owning assets. “Our general belief is that there”™s a lot more downturn to come,” he said. For the next six to 12 months, “Things are only going to get worse as it goes forward.”
Looking ahead to next year, “I think ”™09 is going to be pretty spooky,” Pauley said. “I think the leveraging problem is not going to be fixed” as “top-of the-capital-stacks banks” get away from lending. “Without that leverage financing, without that senior money, it”™s going to get a little more whippy before things get better.”
