ATLANTA — On Tuesday at InterFace Conference Group and Morris, Manning and Martin LLP’s Commercial Real Estate Investment & Finance 2012 conference in Atlanta, experts from around the industry shared thoughts and perspectives on the state of the commercial market both from a finance and development standpoint. Below is a short summary of the second half of the conference with some key themes from each session. You can read more about the morning’s sessions here.
Restructuring & Recapitalization: What Will Your Lenders Agree To?
The panel members discussed the roles of banks and CMBS lenders in restructuring and recapitalizing debt, including the motivations for banks to restructure versus foreclosing. Ron Glass, principal of GlassRatner Advisory & Capital Group, spoke about the difference between big banks and smaller banks in response to non-performing loans. The mediator, Ann Hambly, CEO and president of 1st Service Solutions, said that in dealing with lenders, it's important to know who you're talking to, which is especially difficult to determine in the CMBS realm. Michael Hartman, director of Reznick Capital Markets, spoke about keeping in mind what the asset or property can bear in terms of financing. The panel members discussed distressed assets and how some were over-leveraged from the start, as well as lenders' preferences to different products in the market. Understanding the market is important to keep in mind when dealing with assets in multiple states. The panel concluded with discussing what's ahead, as the lack of job growth and overall government interference could be a discouragement for lenders. On the other hand, the panel agreed that the amount of activity has been encouraging.
CMBS Status Report
The consensus from the panel is that the market for CMBS is back, but there is some uncertainty, as the question is not necessarily about CMBS, but how the world around us impacts that business, said Tom Aschmeyer, managing director, Jefferies LoanCore Capital. Michael Cohen, executive director for UBS said that the reality is that CMBS is the only way to keep liquidity in this marketplace and the only way trades in the market will get done. Sam Kupersmith, managing director, Cantor Fitzgerald explained that the ability to hedge a position really hasn’t been perfected yet in CMBS “2.0” as he referred to it. Finally, Joel Stephens, managing director, real estate capital markets, Regions Financial Corporation, said that the institutional markets don’t want to take a lot of risks, and that’s reflected in the pricing CMBS lenders are able to offer. Perhaps reflecting a good summation of the state of the market was the panel’s response to the closing question, “how many CMBS loans will we see next year?” Both Aschmeyer and Stephens said “the same,” while Kupersmith said “more,” and Cohen said “a LOT more.”
Real Estate Funds & Other Investment Vehicles: A Capital Alternative
Industry professionals involved in the real estate fund business discussed the ways to raise capital and build business through this alternative structure. The panel covered the challenges of creating a fund, getting access to investors and how changes in the marketplace are affecting real estate funds. First off, Edward Kerley, managing director, portfolio management for IDI Investment Management, said that one of the key reasons to start a fund is for discretionary access to capital. With that said, track record is critical, said D. Pike Aloian, partner, Rothschild Realty, and there is a lot that goes into measuring terms over time, so that’s one major challenge to be aware of. Creating a fund is not simple. Fred Henritze, president, The Brookdale Group, said that getting access to institutional investors is in itself challenging — a fund has to communicate a clear strategy and eliminate as many conflicts of interest as possible. A good fund structure with good fund documents is imperative. Neill Faucett, managing principal, Lubert-Adler Group, explained that funds looking for investors also want operating partners who have the skill set to execute in these proprietary situations, which ends up making the deal work. Henritze added that the current challenges are due diligence has become more sophisticated, there are more funds than there used to be, so there are more choices, and they also have, depending on where in the cycle, ability to dictate terms. All told, in other words, funds are a great source to raise capital for real estate projects, but they are not for the faint of heart.
Development: What Is Being Built?
The panel explored different properties being built and some of the difficulties of the market with new developments. Construction financing is available for existing properties but difficult to come by, with the exception being multifamily properties, according to panelist Bennet Sands, development director for Wood Partners. Jason Hinkel, senior vice president of Duke Realty, spoke about the importance of hospital sponsorship when it comes to developing medical office buildings (MOB). The panelists also discussed the data that they pay the most attention to for their assets. Bryan Blasingame, senior vice president and CIO of IDI Investment Management, said he pays the most attention to supply and demand indicators like vacancy and absorption. Hinkel looks to demographics for MOB development and Sands looks at job growth, occupancy and rent growth. Reid Freeman, executive vice president of Regent Partners, talked about office developments in Atlanta and concludes that effective rent rates have moderately rebounded but that tenant improvement packages have gotten out of control. He also talked about tenant's high demand for build-to-suit developments. Freeman and Blasingame discussed the importance of port economies to developments in coastal cities like Charleston, S.C., and Savannah. The emergence of sustainability and green design was discussed with all panelists agreeing that they see it as important and strive for LEED or Energy-Star standards in their new developments.
Featured Speaker, Ethan Penner, president and founder of CB Richard Ellis Capital Partners
Ethan Penner discussed how commercial real estate is a derivative of the national economy. He spoke of the importance of being “bearish” as opposed to “bullish,” seeing as how the “bullish” habits got the economy in dire straits recently. He also spoke about the dangers of a crowding out effect in Congress and the importance of forbearance as a stimulus. Penner touched on Europe's economic strife and Greece's likely default. For the near future, Penner forecasts that there will likely be a frenzy of activity leading up to the presidential election to simulate growth. Long term, Penner speculates that the importance of mezzanine financing will grow.
Keep an eye on REBusinessOnline’s “Feature Article” section and France Media’s other newsletters (www.francemediainc.com/newsletters) for more in-depth coverage of each topic. Please click here for more information on the event and InterFace Conference Group.
— John Nelson & Dan Marcec