Research Paper Notes CRE Opportunities

In a newly released paper, global business advisory firm AlixPartners LLP suggests that opportunities in commercial real estate this year could surpass ‘even the heady days of the early 1990s.’

‘Of course, commercial real estate fundamentals are still far from good, but I've never seen so much money sitting on the sidelines ready to pounce,’ says Dennis Yeskey, head of the firm's commercial real estate practice. ‘For investors and lenders who are able to get their houses in order, from streamlining operating costs to managing capacities, this could finally be a turnaround year.’

The AlixPartners paper, titled "Commercial Real Estate: What's Ahead?," identifies three factors that might point to an end to the current "gridlock" in the commercial sector.

First, banks are moving to rebuild their tier-one capital reserves, the firm notes. With the current cheap cost of debt, lenders this year certainly hope to rebuild their tier-one capital reserves, according to Yeskey. If they are successful, banks will increase reserves against their toxic commercial real estate loans while creating the ability to write off those loans. This, in turn, will make it easier to perform real debt restructurings and to sell bad loans or underlying foreclosed real estate assets to investors, AlixPartners says.

The firm also points to returning debt availability led by smaller loans. Even though more than $1.5 trillion of debt maturities are coming due over the next 18 months, the AlixPartners paper predicts that debt issuances will return, albeit slowly, to the real estate capital markets.

The firm projects that this debt will come from healthy banks (in the form of small loans), larger life insurers, selected new mezzanine investors, mortgage real estate investment trusts, specialty finance companies and some offshore banks and sovereign wealth funds. Seller financing, along with more conservative underwriting, will also contribute to this trend, says Yeskey.

The third factor that AlixPartners notes in its paper is narrowing bid/ask spreads. Because of factors noted above, commercial real estate sellers should be in a better position to lower their asking prices on distressed properties, according to the paper. Buyers, in turn, should be able to increase their offer prices, and thereby narrow the huge bid/ask gaps that exist today.

SOURCE: AlixPartners


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