The Real Deal Miami

Investment guru discusses bright spots in dismal capital markets

By Jennifer LeClaire | February 10, 2009 12:53PM

As the South Florida market continues to spiral, everyone from large developers to small businesses is screaming for capital. The Real Deal caught up with Mark Gilbert, an executive director with Cushman & Wakefield’s Florida investment sales team, to discuss the state of the capital markets.

The Real Deal: What’s the current state of the capital markets?

Mark Gilbert: The availability of credit for real estate transactions has become harder and harder to obtain. As a result, transaction volume has slowed to a level that we have not seen in recent times. The inability to obtain credit, certainly large amounts of it, is coming at a time when you have large amounts of debts coming due. Private owners, REITs and institutions are being faced with mortgage maturity dates. That started to occur in 2008 but many of these mortgages will come due in 2009 and a gargantuan number will come due in 2010.

TRD: Will we see a wave of refinancings?

MG: Everyone is asking themselves, “Am I going to refinance or sell? And if I am going to refinance, will I be able to refinance at the same level, and the same amount, and on similar terms?” In many cases, if the assets were purchased recently, they will not be able to refinance the same amount of debt.

TRD: How does that impact the potential for sales?

MG: Where we are today, I don’t think there’s a lot of potential for sales. The sales that are taking place today are being characterizing as distressed sales. I wouldn’t necessarily call them distressed properties but I do call it distressed pricing. We have reached this new paradigm where cap rates have moved up at an accelerated level compared to how cap rates fell. Just between the Lehman bankruptcy and today, we have seen another huge shift in cap rates. For many sellers today, it’s not as much about selling at a distressed price as it is about certainty of closing. We are seeing can cap rates shift to a level that is not of interest to sellers that are not in a distressed economic situation.

I’ve heard there are more loan sales. Is that a good thing for the capital markets?

MG: We are starting to see a lot of troubled and defaulted loans sold at discounts to third parties. I think it’s very healthy for the overall real estate market. That allows one of two things to happen: the owner of the note can work with the borrower and resize that loan so that the project makes economic sense or the lender ultimately takes over the project at a substantially reduced basis so they have the potential to earn a profit. In many projects today that are in the development cycle or in the sales cycle, all of the profit has evaporated as a result of the movement in the market.

TRD: So is it all doom and gloom here in South Florida?

MG: It’s only doom and gloom if you are looking at it from one side of the table. If you are the developer that is building 1.8 million square feet of new office space in Downtown Miami, it might appear doom and gloom based on what they expected to achieve and what now may be the reality. On the other hand, it is a huge opportunity in the tenant market because there will be a substantial reduction in rental rates as a result of the amount of excess space put into the market. That will provide an opportunity for businesses to reduce their occupancy costs.

TRD: Will those buildings ultimately be good investments for the developers?

MG: Yes, but I don’t know if they will make great investments for the current owners or for the next owner. The next owner may own it at a fraction of what it actually cost to build or they may own it for more than it cost to build.

TRD: Do you see any turnaround in sight?

MG: I see the real estate market first having to be speared by the economy. When we start to stabilize unemployment and start to see production make the positive turn, we see people starting to spend again. The markets will start to turn as a whole. This real estate cycle is going to be led through an economic turnaround versus more of what we have seen in the past, which is a market turnaround. The economy is going to have to make a shift. I’d bet in the very latter part of this year to sometime in 2010 that will happen. I am certainly not predicting earlier than that.