The Real Deal Miami

Capital market bottom proves elusive

By Jennifer LeClaire | October 27, 2008 01:05PM

In the wake of September’s unprecedented events on Wall Street and the $700 billion bailout, the credit crisis has officially eclipsed the savings and loan crisis of the late 1980s as the event with the greatest impact on the U.S. real estate industry in the past 20 years.

So says a national survey conducted by global law firm DLA Piper. The firm surveyed 424 top executives in the commercial real estate industry.

The survey revealed a record level of pessimism, with 90 percent of respondents describing themselves as “bearish.” That compares to 68 percent in DLA Piper’s year-ago survey.

On the heels of the bankruptcy of Lehman Brothers, a pillar of Wall Street’s steroidal investment banking sector; the government bailouts of Bear Sterns, Fannie Mae, Freddie Mac and AIG; and the historic $700 billion financial services sector bailout, Jay Epstein, head of DLA Piper’s U.S. real estate practice, offered a grim view for the commercial real estate sector.

According to Epstein, there remains a “very fluid situation in the capital markets that likely will continue to bog down the U.S. commercial real estate market until financing finally becomes available on a predictable basis again.”

The silver lining, if there is one, is this: While the bears are clearly alarmed by the market’s current similarities to the S&L crisis, Epsteinsaid a small group of contrarians are prepared to capitalize. These contrarians, he added, are searching for the types of tremendous opportunities that followed the S&L crisis.

Despite unprecedented levels of government intervention, eight out of 10 respondents do not believe that the recent developments concerning Lehman Brothers, AIG and Merrill Lynch signal the “bottom” of the cycle, nor do respondents think they provide the “first sign of light” at the end of the credit crisis tunnel.

“The bailout is a critical component to helping the markets find the bottom and adding some stability back into CMBS [commercial mortgage-backed securities],” said David Steinwedell, managing partner at Austin-based AIC Ventures, a provider of capital to middle-market companies.

“We’ll have to wait and see if a normalcy of pricing returns to the various mortgage-backed securities,” he continued. “Once you see that, then everyone will breathe a sigh of relief. Until then, people will continue to wait on the sidelines, especially lenders.”

Commercial real estate executives aren’t holding their breath, much less sighing with relief.

Most respondents don’t expect securitized lending to recover and return to its previous market levels until at least 2011, while 16 percent reported that securitized lending will never again reach its prior levels.

Still, debt and equity experts are holding out hope for the capital markets. While no one has risen to fill the gaping hole the CMBS market has left, investors who have exited the market are readying to reenter with new products, according to Charles Foschini, vice chairman of the Debt and Equity Group at Cushman & Wakefield.

“New investment products aren’t created on a dime,” Foschini said. “By this time next year we’ll see lenders come on line to fill the gap. We’ll also see some foreign banks, especially Spanish banks, come in with products.”

Steinwedell agreed, noting that when the S&Ls failed in the late 80s and early 90s, something had to fill the void – and it did. If commercial real estate executives are right and the CMBS market doesn’t recover quickly, Steinwedell is also confident that new products will arise.

“Capital hates a vacuum. There is a need for capital on the lending side and we’ll see solutions, whether that’s increased lending from life insurance companies or banks or some other source,” Steinwedell says. “Even now, there are still ways to get deals done.”