FINfacts Newsletter XVI-34

By Allison Higgins

“Distress is Good” and the market will get worse before it gets better was the take-away at the Urban Land Institute’s annual Emerging Trends in Real Estate Conference which took place in Los Angeles on November 20, 2008. Keith Rosenthal, President and Co-Founder of Phoenix Realty Group, one of the members of the Capital Provider Panel, commented that increasing distress in 2009 will facilitate a recovery. Buyers, as well as debt providers, are sitting on the sidelines because the market has yet to establish a “clearing price”. Once the de-leveraging, foreclosures and recapitalizations move through the market, a “clearing price” will be established and the market will find a new equilibrium.

While all panelists agree that 2009 may be bleak as cap rates continue to rise and debt remains tight, downturns present opportunity for well-capitalized investors. Sellers will eventually capitulate, creating a tremendous buying opportunity. Rick Neilson, another member of the Panel and senior vice president of Bank of America, noted that clients are keeping their lines of credit available to capitalize on opportunities in 2009. Investors will also see an increase in note sales through 2009. Many factors, including TARP funds, slowed banks from recognizing losses and moving non-performing assets off their books in 2008. As delinquencies rise in 2009, and with increased pressure from regulators, banks will clean up their balance sheets and finally write-down more bad debt. Panelists also agreed that the CMBS market will eventually return but will compete more with traditional balance sheet lenders. CMBS lenders will need to hold the debt on their balance sheet for seasoning and maintain part of the debt on book to share in the risk.

Robert Gardner, Managing Director of Robert Charles Lesser & Co. presented a Market Overview in which he noted that the U.S. is experiencing structural changes, incentivizing investment in urban, infill locations. Investors should focus on “Global Pathway Markets,” which are 24-hour coastal cities including Seattle, San Francisco, Los Angeles, D.C., New York, and Boston. The U.S. is currently experiencing 1.4 million net new households annually, the equivalent of one new Phoenix metro area per year. Similarly, expect tremendous growth in the 20-30 age range as Generation Y graduates from college and adds to housing demand.

The much needed correction may provide opportunity for some, but more importantly, provide a turning point which will bring debt back to the market and the equilibrium necessary to once again underwrite and price new transactions.