Investing from the Ashes

Yesterday I had the opportunity to appear on a very interesting panel at the Bloomberg Commercial Real Estate Conference: “Investing from the Ashes: The Distressed Market.”

The panel examined the investment outlook and areas of both risk and opportunity in distressed real estate. Representing the viewpoint of special servicers was Robert Lieber of C-III Capital, while Billy Macklowe offered the owner’s perspective, focused particularly in New York City.

As was mentioned on the panel, right now the outlook for distress is a mixed bag: We’re at a four-year low for new distress, but there are signs that 2013 volume will increase. CMBS loans remain the largest share of outstanding distress, and there’s another major wave of delinquency in the future as the 10-year loans from 2005-7 mature.

We see the next generation of opportunity is in secondary markets, where population growth and fundamentals (housing, job growth, etc.) are starting to rebound. In some cases like Tampa and Memphis, these markets are early beneficiaries of the shift in global trade patterns and changes in our logistics network in anticipation of the 2015 Panama Canal expansion. We also see industrial property as a stable asset class, with the least exposure from CMBS distress.

From our perspective, the greatest market risk is from interest rate sensitivity. A rise of 200 basis points in interest rates over the next two years—below the long-term trend—could, by our estimation, potentially add 20 to 25 percent new distress to the market. The hope, of course, is that interest rates would be rising in response to other positives in the economy as a whole, but it’s nonetheless a major risk for investors in the distressed space.

I very much enjoyed the opportunity to participate, and hear the perspectives of our peers in the market. Thanks to Beth Jinks and Bloomberg News for making it possible.

Here is a link to the video: http://bloom.bg/PShonm