IMN Real Estate Private Equity Conference Tidbits
A rolling loan gathers no loss.
Unnamed Banker....as retold by Joe Sitt
I was fortunate enough to attend IMN's recent US Real Estate Opportunity & Private Fund Investing Forum held last Thursday and Friday. The conference was well attended, I don't have an actual count, but it was as big as the Wall Street equity conferences I used to attend at the Sheraton years ago in the bull market boom days and there were so many Masters of the Universe present it was hard to get a seat in the main ballroom. The mood was grim but energized. What does that mean? Attendees seemed every bit as pessimistic about the commercial real estate market as I could have expected, although there was a range of views extending from "it's bad" to "fuggedaboutit." But nearly everyone was excited about the opportunity to eventually find bargains in the market for the first time in years.
The following is a collection of quotes from the conference, which I hope will give Urban Digs some flavor for what professional money managers in the commercial real estate business are thinking about the banking system and New York City, without going into a lot of details on specific sectors or subjects, which would not serve Urban Digs readers' purposes.
The quote featured above by an unnamed banker was to my mind the most pithy of the conference. The length of this commercial real estate downturn and the "time to opportunity" is in part controlled by the banks and their regulators....as one could say it is for the economy as a whole. The fact is that banks are still pushing off the inevitable and hoping that the days of cap rates below financing rates will return and bail them out of loans made at the top of the cycle, that were clearly for overpriced transactions/projects and structured with way too much leverage.
One manager, Sush Torgalkar of Westbrook Partners, described the kinds of deals he is looking for going forward. "Good IRR on an unlevered basis, discount to construction cost less land and located in major markets." (For future reference, I don't write that fast, so quotes may not be verbatim, but generally capture what was said). I saw a lot of head nodding when Sush talked about deals that would get his attention and conclude that banks trying to peddle bad loans in secondary and tertiary markets for a premium to construction cost at small discounts to par may not be too successful.
One of the panels focused exclusively on the New York City market. It was averred that prior ideas that somehow the City would sidestep the problems in the rest of the country were not the case, with New York clearly suffering like everywhere else. However, Brad Klatt of property developer Roseland Property Company made the very good point that "Capital infusions and recovering equity markets with the ability to raise capital are an artificial catalyst to the New York market, keeping job attrition less than expected and less than in other geographies because the institutions being saved are either headquartered in New York or have substantial employment here." (Wall Street employment and its impact on the future of the New York City residential market will be featured in a piece on Urban Digs soon, as I previously promised - anyone with good stats send 'em in). That said, it was agreed that in office and hospitality markets, New York was doing its damndest to catch down to the rest of the country. It is said that retail in the City is being buffered by global retailers looking to enter the U.S. major metro areas with New York City being first choice - something we talked about here at Urban Digs a couple of months back in a piece on retail. There was even a mention of Chinese investor interest in New York City real estate....Ah, hope springs eternal! Investors agreed, though, that the recent benchmark set by the sale of Worldwide Plaza on Eighth Avenue for a reported 60% discount to its 2007 sale to Harry Macklowe was a good example of just how ugly the New York City commercial real estate market has become.
Besides his banker quote, Joe Sitt mentioned that land could be purchased in New York City for $30 - $50 per FAR (roughly buildable square foot for the uninitiated). I have to believe he was referring to the boroughs, though as at the peak asking prices in Manhattan's secondary markets like downtown and Harlem were as high as $500 to $600 per FAR (although I don't no how many unlucky souls actually paid them.) I am as bearish on New York City land prices as anyone, because in some cases partially built structures are not worth completing and fully constructed buildings are worth only a percentage of construction cost, both implying a theoretical negative value to the land, currently. Theory aside, a decent piece of land on Manhattan Island should still go for several hundred dollars per FAR even if it is going to be land banked for five years, as there was wide agreement that longer term New York City was underserved in a variety of asset classes (retail and housing come to mind). I have made note many times in the past that New York City is a demand-driven market, it can still get hit because of waning demand (particularly if property is over-priced and over-levered), but for the most part barriers to building and the City's huge scale make over-building very difficult.
Interestingly, one panelist asserted that you can make the numbers work on construction of a new rental building today in New York City, based on significantly lower land prices and lower construction costs, but you will be able to buy an 85% finished job for 30 cents on the dollar, so why take all the development risk?
Other interesting quotes:
"I have seen a big increase in activity in the last 2 months, workout teams are taking over the bad loan portfolios." - Jay Neveloff of Kramer Levin
"It takes time for the workout teams to be hired and ramped up, forebearance was mandated because the infrastructure to execute dispositions wasn't there." - Nick Bienstock of Savanna Funds
Other Voices:
"At some point the government will approach the banks to clear out their bad loans and take the hit, maybe before year-end."
"Regulators will facilitate write-offs through the annual examination process."
"The amount of equity ready to invest is small versus the amount of bad debt."
"The only assets the banks will sell are headed to foreclosure."
Comments (9)
Deutsche Bank is out today predicting another 40% decline in NY home prices. We are entering the spin zone where the buyers want the banks to start feeling desperation. I imagine it starts with the construction loans and then moves up to the multifam perms written after 2004, resting finally with anyone who needs to refi, bought a home after 2004 and can't cut a check to close. I also wonder how many co-op boards are going to drive themselves into insolvency by refusing to allow market pricing creep into their fiefdoms. I would not be surprised to see the beginning of the end of co-ops in Manhattan once it is all said and done, five to seven years from now.
Posted by Fred | June 16, 2009 11:42 AM
We have all been reading a lot about coops' resistance to allowing sales at market clearing prices. Interestingly, I am also hearing about another phenomenon recently, coops are beginning to feel stress on their operating budgets and their ability to service their mortgages. This is a little surprising, because usually the mortgages are small vestiges of the debt from when the building went from rental to coop or a mortgage to pay for capital improvements and the debt service is not particularly high. The bank loan is secured by the building, but the bank looks at the rental value of the building, which is usually fairly low vs. a residential sell out value, which is another reason why the mortgages are small.
Posted by Jeffrey M. Bernstein | June 16, 2009 4:43 PM
Well, at least we can be thankful for one thing:
We're not in California.
http://www.washingtonpost.com/wp-dyn/content/
article/2009/06/15/AR2009061503249.html
Conclusion:
If the US is given a choice between protecting its credit rating and supporting the states then very clearly they are going to chooose the former.
Posted by In Debt We Trust | June 16, 2009 5:49 PM
If Cali. goes under then there will be a debt crisis in the muni's. However, it's their own making. They've been spending way too much as it is and coincidently a good proxy for what the federal level will look like in a few decades at this rate. Noah, what would a muni debt crisis do to the NYC area seeing as it has it's own budget concerns? Could it spark a new wave of fear about the city?
Posted by MeekSheep | June 16, 2009 9:33 PM
There is still one simplifying assumption that I believe the bulk of New York residential and commercial real estate investors are making, which is that New York will not go back to the way it was pre Giuliani. For now I'm making that assumption too. Obviously a major fiscal crisis, would through that assumption into question and add a crime/quality of life risk premium to the price discounting mechanism at work in the New York City market.
Posted by jeff | June 17, 2009 7:57 AM
There is already a debt crisis in the munis. Why do you think wall street is talking up all the opportunities that exist in the muni sector at the moment? All they mention is yield - never default risk.
Jeff - I don't see us going there either. I envision a deflation scenario where all prices adjust downwards proportionally, and where debt gets defaulted out of the system.
All the talk of inflation is a red herring. We are Japan.
Posted by Thisson | June 17, 2009 3:27 PM
"Interestingly, one panelist asserted that you can make the numbers work on construction of a new rental building today in New York City, based on significantly lower land prices and lower construction costs, but you will be able to buy an 85% finished job for 30 cents on the dollar, so why take all the development risk?"
If the above statement is in fact true, Deutsche Bank's prediction may in fact prove to be highly clairvoyant.
Is the un-named panelist telling it like it is? Or is he exaggerating? Noah, anyone?
Posted by mgnyc | June 18, 2009 4:20 PM
With regards to the Pre-Guiliani scenerio:
I would say that significant structural investments and current technology should prevent such a state of chaos and lawlessness. Also let's not forget the Crack Epedemic played a huge role in the cities cultural demise.
That said, Guiliani was mayor between 1994-2001.
Posted by mgnyc | June 18, 2009 4:35 PM
Ultimately, I think the Deutsche Bank report of 40% will cause banks to expedite the selloff of their bad debt. The "Bad Bank" entity that the Fed was going to start does not look like it is going to happen anymore. There was a report 6 months ago in Florida that prices were going to fall more, similar to this report. I walked into a bank and bought 6 multi-family (duplex) units for 15 cents on the dollar; spoke to the regional manager and he said the CEO gave them until April 2009 to clear the books. Was a pretty nice score for me, and the bank thanked me! Essentially, this could happen in NYC and metro markets also very soon.
Posted by Scott | June 21, 2009 9:18 AM