The Real Deal New York

Interest rate hikes may spur second round of distress: Macklowe

May 17, 2011 12:59PM
By Adam Pincus

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From left to right: Stephen Tomlinson, Merrick Kleeman, Gregory Rush, Simon Ziff and William Macklowe

Once the current period of historically low interest rates comes to an end, the commercial real estate market will likely enter another period of distress as refinancing becomes more expensive for troubled properties, William Macklowe, CEO of William Macklowe Company, said.

During the upcoming presidential election year, he expects President Barack Obama will do what he can to keep rates low, and “that will keep a lot of the impaired or partially impaired assets performing,” Macklowe said, speaking on a panel in Midtown this morning hosted by publisher Bisnow.

But then he forecast that rates will rise, and his firm was planning on that possibility.

“We think — and the way we are raising our capital — is to prepare ourselves for the next round of distress which is when rates move,” Macklowe said.

Macklowe was on a panel with Simon Ziff, president of real estate advisory firm Ackman-Ziff; Merrick Kleeman, managing partner with Wheelock Street Capital; and Gregory Rush, partner in Dune Real Estate. The session was moderated by Stephen Tomlinson, senior partner at law firm Kirkland & Ellis.

ZIff said the debt markets have recovered from the near standstill that began in late 2008, and have even begun providing financing for deals that are not financeable on their own.

“Debt is going to drive the next level of equity deals, which will be in other markets, and portfolios of — I won’t say shit — but stuff that people wouldn’t normally do… unless it was in a portfolio,” Ziff said.

Macklowe also said a lot of equity raised with the expectation of getting back so-called opportunistic rates of 18 percent has not been spent, and some of those expectant investors will be disappointed.

“That capital has a completely different return expectation than today’s markets can deliver. That is a big challenge,” he said.

Kleeman highlighted broader economic trends, suggesting the federal government was supporting real estate prices through a policy of buying Treasury bills, in order to maintain property values at an artificially high level.

“This has been a backwards market where they say let’s get pricing up first and that will drag fundamentals up,” he said. “At every point in the recovery it is going to feel that prices are just a little too expensive.”

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