As the real estate markets crash and burn so, too, will a number of real estate investment management firms, experts say.
Nobody is really sure which firms will survive to invest again, but industry insiders are fairly certain there will be fewer real estate investment managers around this time next year.
One of the wild cards is that limited partnerships, with their 10-year average lives, might keep some firms around longer than they might have lasted if investors still owned most of their real estate directly.
Unanswered questions persist. What will happen to a portfolio if the manager can no longer make the mortgage payments or when the property values dip below the cost of the debt? What happens if investors refuse to invest more capital to make the payments on troubled properties?
While consultants, money managers and investors are loath to point fingers at particular managers, there are hints at who these managers are. Some new managers, dubbed by some observers as one-fund-wonders, might have trouble raising a second fund and slip away. Highly leveraged investment firms, managers that took advantage of the commercial mortgage-backed securities market for the bulk of their debt and managers exposed to short-term debt could be in for trouble.
Real estate investment managers with troubled properties include Broadway Partners Fund Manager LLC, Tishman Speyer Properties, Maguire Properties, Apollo Real Estate Advisors, Deutsche Bank AG, Morgan Stanley and Brookfield Asset Management Inc. Any deal with Lehman Brothers Holdings Inc.s financing in the mix or Equity Office Properties Trust property flipped by New York private equity firm Blackstone Group also is suspect, a few industry insiders say. Blackstone Group sold the EOP properties for high prices at what real estate investors now say was the markets zenith.
Not only are managers feeling the pinch of the credit squeeze, but some real estate investment trusts that couldnt resist piling on cheap debt are now being crushed by it. Feldman Mall Properties Inc., Centro Properties Trust, General Growth Properties Inc., Maguire Properties, Macquarie Office Trust, Allco Commercial REIT, Record Realty and Rubicon are faltering, and they are selling or contemplating selling off properties because they need the cash to pay off their debt, according to research by Real Capital Analytics Inc., New York.
For example, Australian REIT Centro Properties is selling billions of dollars in shopping centers in the U.S. and Australia. Allco Finance Groups Rubicon and Record Realty REITs are selling off large portfolios of office buildings in the U.S. Maguire Properties Inc. recently managed to refinance a $100 million loan on an office building in Pasadena, Calif., and extended two construction loans, but its new management still has a ways to go to reduce the debt on its balance sheet.
Nobody is selling right now unless they have to, said Chauncey C. Mayfield, president and chief executive officer of MayfieldGentry Realty Advisors Inc., a Detroit-based real estate investment firm.
LaSalle Investment Management, Chicago, is buying and selling real estate but very selectively in this market, said Peter Schaff, North America chief executive officer and head of the regions private equity real estate business.
Who is to say where the bottom is? There is little penalty for being patient right now, although we will act where we perceive good long-term value Mr. Schaff said.