BLOG VIEW: You may remember the opening line of Charles Dickens' ‘A Tale of Two Cities’: It was the best of times, it was the worst of times. Well, a number of companies are operating under the belief that if we were to divide today's real estate finance market along Dickensian parameters, we would be in the best of times. Not only that, but they are encouraging investors to follow their drumbeat in a new parade of initial public offerings (IPOs).
In the past few months, companies announcing IPO plans have included Alexander Mortgage REIT Inc., Ally Financial, American Capital Mortgage Investment, CoStar Group Inc., Nationstar Mortgage, PIMCO REIT Inc., Provident Mortgage Capital Associates Inc., Putnam Mortgage Opportunities and Zillow Inc. Malkin Holdings, the owner of New York's Empire State Building, is also reportedly planning to launch a new publicly traded company, although it would need approval from a large number of partners in the landmark skyscraper before it could proceed.
On the surface, this new enthusiasm for IPOs may seem like an acute case of very poor timing. After all, the latest data from Standard & Poor's suggests that the residential housing market has entered a double-dip recession, while RealtyTrac reported in March that sales of bank-owned homes and those in some stage of foreclosure accounted for 28% of all U.S. residential sales in the first quarter. Even Treasury Secretary Timothy Geithner – who has been evasive for too long about the lack of housing market recovery – admits that ‘we've got several more years to go’ before that battered marketplace heals.
On the other side of the industry, commercial and multifamily mortgage originations were 25% lower in the first quarter of this year than during the fourth quarter of 2010, according to the most recent Mortgage Bankers Association Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. Furthermore, Fitch Ratings projects that commercial mortgage-backed securities loan defaults will top 12% by the end of the year.
Plus, we have an economy that could be charitably defined as stagnant and an unemployment rate at 9.1% – not exactly the conditions to stimulate growth in any industry, let alone real estate finance. The last thing that many people would dream of doing at this point in time is investing large sums into a real-estate-related company.
However, there is logic to this new eruption of IPOs. The mortgage banking companies announcing these offerings are clearly interested in attracting long-haul investors who are patient enough to wait out the industry's rough period in the hope of a vibrant recovery – even if it takes us to the far end of this decade.
Also, the companies staking out IPOs now have a solid track record. Unlike the ephemeral dot-com companies of the last decade – which soaked up investor funds based solely on the vague promise of near-term future profits – companies like CoStar, PIMCO and Zillow are fixtures within the industry, and they are widely respected for providing vigorous corporate leadership within their respective sectors. Investors who keep an eye on real estate finance will clearly be very interested in following their IPOs.
I don't want to steal Jim Cramer's shtick when it comes to brashly predicting Wall Street winners, but I would put my chips are on the IPOs connected to companies in commercial real estate. Although that part of the industry is facing its share of headaches, it is somewhat healthier than residential real estate and it should get fully back on its feet much sooner – especially as the multifamily sector vigorously responds to the general public's growing preference for home rentals over of homeownership.
I wish the companies in the IPO parade the best of luck, because their success will generate investor respect in real estate finance. Of course, there is no guarantee that successful IPOs will spark long-overdue recovery. But at this stage of the game, any good news offers a level of encouragement that has eluded us for too long.
– Phil Hall, editor, Secondary Marketing Executive
(Please address all comments regarding this opinion column to hallp@sme-online.com.)
