Real estate is starting to yield solid investment opportunities that are expected to grow considerably over the next two years, industry insiders say.
So far, the land rush that industry professionals had expected at the beginning of the global economic meltdown has not materialized.
“The debt crisis of 2008, 2009 and 2010 is the best opportunity that never happened,” quipped Mike Straneva, Americas and global director of transaction real estate in the Phoenix office of Ernst & Young LLC.
Investors with pools of capital are poised to purchase properties that lenders do not want to own through foreclosure, as well as properties that owners can't afford to keep when loans come due.
Jeff Giller, managing partner of Clairvue Capital Partners, a real estate investment firm in San Francisco, said an estimated $230 billion will be needed to rebalance the roughly $1 trillion in commercial mortgages coming due over the next three years and $50 billion for the approximately $125 billion of debt maturing in real estate private equity funds.
Money managers, real estate investment trusts and consortiums that include institutional investors are swooping in with much-needed cash to pick the best properties. Money managers, real estate investment management firms and hedge funds have amassed capital to buy real estate debt and rescue beleaguered property owners.
The owners include private equity real estate funds that bought properties using mostly debt in the high-flying days that reached a crescendo in 2007.
Institutional investors also are getting in on the buying, forming joint ventures to pick up substantial interests in mostly core properties with steady cash flows that have hit hard times.
One such investor is the Canada Pension Plan Investment Board, which entered into joint ventures to buy 45% stakes in several properties this year. The CPPIB acquired a 45% interest in 1221 Avenue of the Americas, New York, for US$576 million in debt and equity. At the same time, it formed a joint venture with SL Green Realty Corp. to purchase a 45% stake in 600 Lexington Ave., also in New York, for US$87 million.
Officials at the Toronto-based board, with C$138.6 billion (US$138.2 billion) in total assets, have estimated the properties had a combined value of US$1.45 billion.
“We're definitely seeing more creative acquisition work” as investors look to invest in the debt in order to get the property, said Jason Kopcak, managing director and head of whole loans at Cantor Fitzgerald & Co., New York, which started an investment banking business in 2008. “Private equity and hedge funds are buying the debt with the ultimate goal of buying the assets.”
Mr. Kopcak works with banks and hedge funds to helpwith dispositions of the real estate loans they own.
However, instead of buying a bag of miscellaneous real estate debt as they did in 2007 and 2008, hedge funds and other investors are becoming more specialized, only investing in the debt of certain real estate property types with which they are most comfortable, he said.
Speaking about banks that extended mortgages in hopes the real estate market would turn around, Jahn Brodwin, senior managing director at real estate consultant FTI Schonbraun McCann Group in New York, said: “We're just at the tip of it. The "extend and pretend' eventually has to come to an end.
By next year, as properties are sold, “there will be a big shuffling of the deck in the ownership of real estate,” said Mr. Brodwin.
“It looks like it did in the mid-1990s, when public REITs were buying everything,” he said.