Wednesday, August 19, 2009

On the Road-New York/Boston

The story of the week in the institutional real estate world is RREEF America III. I don't know any more than I've read (well, maybe a little more) but I feel that as this situation plays out it may be the a 'test case' of more of what's yet to come. Many folks I speak with feel that the super stress, versus just the real stress that is being felt now, will manifest itself in opportunities in the first and second quarter of 2010 especially after year end valuations likely come in lower again. And, this time around, the vulture funds are likely to be those we've been living and eating with for many years inside our industry. I don't believe (although I do know of some boutique managers that are trying to raise capital) that we'll see the type of action that we saw in the early 90's when firms like JER, Starwood, Praedium and others glommed onto assets at RTC prices that even Filene's basement (long may it rest) wouldn't dare discount their merchandise to. But some people think there may be more and more interest in what may evolve from the PPIP program and some investors are taking a wait and see approach before committing whatever dollars they're sitting on to other strategies. It may be hard to compete with a combination of easy access to distressed transactions, government support and attractive returns.

I've been around the real estate industry a long time but this week I learned a phrase that, while not unique to real estate, is one I'd never heard: Stalking Horse Bidder. Do you know about this? So here's what it says on Investopedia: An initial bid on a bankrupt company's assets from an interested buyer chosen by the bankrupt company. From a pool of bidders, the bankrupt company chooses the stalking horse to make the first bid. This method allows the distressed company to avoid low bids on its assets. Once the stalking horse has made its bid, other potential buyers may submit competing bids for the bankrupt company's assets. In essence, the stalking horse sets the bar so that other bidders can't low-ball the purchase price.

INREV, the European Association for Investors in Non-Listed Real Estate Vehicles (btw, I'm a on the membership committee if anyone is interested in learning about the benefits of INREV membership) puts out some of the best industry research around. Here are a few tidbits from their just released Debt Study 2009:

-A shift towards relationship banking is predicted; renewed importance of good communication is stressed.
-LTV breaches are common and seen more as technical defaults with bankers concentrating on cases where interest coverage rations have been breached.
-One-third of investors surveyed see the most problems in value added funds rather than opportunity funds.
-More than 72% of investors surveyed are invested in funds which have re-arranged financing with existing lenders since the second half of 2008

As things continue to shakeout, an interesting niche is the growing business of purchasing secondary real estate interests in private partnerships. This is an area that has been vibrant in the private equity world for some time but has just begun to get more notice in our world as some institutional investors want or need to exit existing investments or unfunded commitments. I found a good white paper on the subject and here are a few highlights:

1. SECONDARY BIDS DECLINE 61% IN 3Q2009: Median secondary bids continue to decline for interests in commercial real estate private partnerships relative to private equity partnerships, due to concerns about vacancies, rental rates and refinancing risks. As of July 15, 2009, the median secondary bid was approximately 22.06 (as a percentage of net asset value) for interests in global commercial real estate partnerships, a 61% decline vs.56.25 as of June 1, 2009.

2. SECONDARY PRICE EXECUTIONS BELOW REPLACEMENT COSTS: Secondary buyers have been acquiring interests in commercial real estate partnerships at prices as low as 45.56% of the replacement cost of underlying properties. This typically occurs when private partnerships’ net asset values are written down below the replacement cost of underlying properties, and secondary buyers acquire interests in such partnerships at discounts to net asset

3. REFINANCING RISK IS TOP CONCERN: Secondary buyers are mostly concerned about evaluating the risk of refinancing 4 to 10 year term loans originated during the 2005 to 2008 period. Approximately $17 billion, $28 billion, and $40 billion of loans to commercial properties are expected to mature in 2009, 2010, and 2011. However, the majority of refinancing risk will occur in 2015, 2016, and 2017 as $92 billion, $132 billion and $133 billion of loans

4. PROPERTY TYPE RISK: In general, multifamily investor properties will offer the lowest risk among commercial properties in 2009 through 2012, primarily based on increased demand from prior homeowners. Multifamily is the only commercial real estate category expected to have an increase in net absorption in 2009, (defined as the square footage leased after deducting the square footage vacated in a region for a specified period). Retail properties, followed closely by office properties, have the highest investor risks in 2009 through 2012. Retail is being hurt by a lack of customer demand and also by a reduction of receivables and inventory alternatives. Office is being hurt as corporate tenants downsize or go out of business. In general, secondary buyers are seeking diversification among commercial property types.

A good number of years ago I came up with an idea for a magazine called "Tribute." It was to have been a tribute to people who have passed away but not just celebrities. On Thursday this week, the New York Times online did not have any obituaries. Now they are really focused on the deaths of people of note, from all walks of life (although they have gotten into some more obscure musician obits of late). I guess my point here is that while we are a society addicted to celebrity, everyone's life matters and while I know that there are websites where anyone, for a fee, can post an obit about a loved-one or friend, I wonder if our at least one industry trade association shouldn't be thinking of chronicling the lives of real influencers on the institutional/commercial real estate industry on their website. Given that we all agree (I think) that ours is a people business then I feel it would be not only a nice gesture but also more an educational opportunity to those of us who don't know the name Harry Helmsley or Sidney Barton (the creator of the retail sale/leaseback and to whom I acted as a consultant for) or auctioneer Steven Good or Trammell Crow. There is more thought that needs to be given to this but education is something that benefits everyone and reading about what someone did in their life, to further the industry, to help others, to make a difference, well I think there's a need for that. I wonder if anyone will step up and take on this idea.

The amazing thing about the Internet is that you never know what will surface at any given time. For example, this week someone posted a video from 2002 of OM Trio playing at Moe's Alley in Santa Cruz, CA. This is OM Trio at it's finest (Disclaimer: My son Brian is the keyboardist in OM Trio). Anyway, to me, the thing that differentiates music is whether it stands up to the test of time. A review of a later OM Trio show at the same venue said: OM Trio brought their "elevator music for headbangers" to an intimate crowd on Thursday October 21, 2004 at Moe's Alley in Santa Cruz.....the band wowed the audience with their unique mix of musical styles. (Think Medeski, Martin&Wood only funkier and more hard rock.) Brian Felix on keys has a jazzy edge to his style, peppered with weird synth noises and prerecorded electronica, Pete Novembre on bass is a funky machine and Ilya Stemkovsky is a hard driving drum monster. Even without a guitar in the band these three guys bring it, blending hard rock, funk and jazz into a danceable stew....OM Trio consistently proves they can choose any style of music and make it their own."You can buy their last CD, "Global Positioning Record” here: But, as seeing them live is the true experience I only hope that they decide to reunite once a year to satisfy requests of many of their fans.

For years, Ken Munkacy (GID Investment Advisers LLC) and I have been talking about getting together to jam. Ken is a very talented guitarist and, well, we finally did it this week at Ken’s Boston home. Sadly, I haven’t had much opportunity to play music with people lately and it’s something I sorely miss (as I’m really an ensemble player rather than a soloist). But boy, did we have fun as we both knew a lot of, well, classic rock songs and one just led to another. I haven’t talked with him about this but I believe the next step is getting a bass and drums involved. Can you say “Industry Rock and Roll Band” in formation?

One of my good industry friends, Ted Leary sent this to me and I wanted to share it with you It's from an article on US Commercial Real Estate Today in the Financial Times:
“When presented with positive signs emanating from the U.S. property market, remember the words of Friedrich Nietzsche:” “Hope is the worst of evils, for it prolongs the torments of man”
Ted says, "Sounds like Freddie was the first “Workout Philosopher.”

Restaurant of the week: Fabio Piccolo Fiore, 230 East 44th Street, NY. Traditional Italian prepared and served properly. Piano player on the premises.

On the road.....
North Carolina

Photo: Sean Felix takes in his first White Sox game. Hey, he's a South Side Chicago type guy!

These are my personal views and not that of my employer.

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