Distressed real estate investors have billions waiting to be spent, but a lack of deals gives them few places to go.
Some $9 billion has been raised so far this year by real estate funds that either completely or partially focused on distressed real estate equity and debt, according to Preqin, an alternative investment research firm in London. Real estate firms are seeking to raise a whopping $94 billion for funds that would focus on or include distressed investing, Preqin said.
But with owners reluctant to sell at a loss and buyers wanting only bargains, the distressed real estate market — estimated at $124 billion by Real Capital Analytics Inc. — is stalled.
In addition, banks have an estimated $2 trillion in real estate and real estate debt on their balance sheets. The securitized real estate market, which includes commercial mortgage-backed securities, has been unable to sell off loans. That's because each bundle holds so many mortgages that it's unclear who has the authority to sell which pieces.
Investors and real estate managers expect more distressed properties to come up for sale within the next six to nine months.
“We're in a time where fortunes will be made if the capital is properly deployed at the right values,” said Christopher Seyfarth, partner in the San Francisco office of Ernst & Young LLC. “But for that dynamic to work, you need sellers.”
Some residential real estate and land sales have begun to dribble into the market. In a classic “loan-to-own” deal, Fortress Investment Group, a New York hedge fund and private equity firm, bought about $100 million in real estate debt on which it started foreclosure proceedings and won the auction as lone bidder. As a result, Fortress now owns Sheffield57, an unfinished condominium project once owned by a group of investors led by real estate developer Kent Swig. That group had bought the property for $418 million in 2005.
Clearly institutional investors see investment opportunities in distressed real estate and real estate debt. The Blackstone Group raised more than $13 billion for two real estate funds this year, part of which is for distressed investing. Lone Star Funds is in the process of raising two funds totaling $20 billion for distressed real estate and real estate debt, sources said.
There are some signs of stress. Commercial real estate prices dropped to record lows, down 18.1% in the second quarter and 22% as of July 31, according to the Moody's REAL commercial property index developed by the Massachusetts Institute of Technology Center for Real Estate.
Commercial real estate prices are down 32% from this time last year and 39% from their mid-2007 peakaccording to the index.
Industry insiders said real estate values have dropped even more than the numbers reflect.
“Values have declined 30% to 40% for Class A NCREIF (Property index) properties,” said David Lynn, managing director of research and investment strategy at New York-based real estate investment manager ING Clarion Partners. Properties in less popular locales dropped 70% to 80%, he said.