One of the major plot points of last week's ICSC RECon in Las Vegas was the deluge of firms expressing interest in taking a piece of what many assume could be a multi-billion dollar business in coming months and years—managing distressed assets that get turned over to banks. Roughly, three groups of firms in the industry are trying to win this business--owners, brokerage firms and third-party managers. The result—companies that have not competed head-to-head in the past will face down each other as they try to gain new business.
Just before the RECon show, Chattanooga-based regional mall REIT CBL & Associates Properties, Inc., for example, announced an initiative to expand the firm's third party management business. The company wants to apply the expertise gleaned from operating its own 83.6-million-square-foot portfolio in offering its services to financial institutions. As part of the initiative, CBL has created a new business development team, spearheaded by Jay Wiseman, vice president, responsible for coordinating third party management efforts.
Cincinnati, Ohio-based Phillips Edison & Co. is another owner with interest in distress. The firm feels it can help revive problem assets because of its experience as a turnaround specialist, its 25-million-square-foot portfolio and its clean balance sheet. (It recently completed a $118 million secured revolving credit facility and has no meaningful maturities until 2011. In addition, the firm has $200 million in equity to spend). "We're one of the few that have capital and a national operating platform," said principal Jeffrey Edison in an interview at the show. "That is what we are promoting and looking for in potential joint ventures. We can look at problems such as lost occupancy, cut expenses, put money back into properties and shore up leasing."
Similarly, in March, Chicago-based Urban Retail Properties formed an alliance with StreetMac, a Northbrook, Ill.-based commercial real estate financing firm, to advise Urban on opportunities for acquiring and managing distressed retail real estate. "It puts us in a position that we have a vertically integrated offer for special servicers and can be out actively soliciting our capability of buying debt at a discount," Urban CEO Ross Glickman said last week in an interview at RECon.
St. Petersburg, Fla.-based Sembler Co. is also pushing its capabilities to help lenders. "There are a lot of people that will own assets without the expertise to manage them," said COO Ronald Wheeler in an interview last week. "We can put a team together quickly so the lender knows quickly what the story is with accounting, receivables, co-tenancy issues and tenant needs."
What Urban, CBL and Sembler have in common is the experience of owning and managing properties and the firms’ existing relationships with tenants and service providers due to the large portfolios of shopping centers they currently control. However, on the other side of the ledger are the brokers. Brokerage firms Jones Lang LaSalle, CB Richard Ellis, SRS Real Estate Partners and Marcus & Millichap Real Estate Investment Services have all in recent months aggressively pushed to market their expertise in receivership.
Foreign investors in real estate could become a wild card in the mix and may potentially emerge as buyers of troubled assets from the banks. According to a survey conducted by the Washington, D.C.-based Association of Foreign Investors in Real Estate (AFIRE), lenders say they plan to increase lending by 54 percent globally and by 58 percent in the U.S. Meanwhile, equity investors plan to increase investment activity by 40 percent globally and by 73 percent in the U.S. According to Ronald Altoon, a founder of Los Angeles-based Altoon + Porter Architects, foreign investors may target distressed assets. Altoon recently addressed a meeting of the association where buyers expressed interest. "What they need is someone to tell them the truth about those assets," Altoon said.
The opportunity for distressed assets becomes clear in examining the numbers. Recent numbers from Realpoint, a Horsham, Pa.-based credit rating agency, show that already more than $17 billion in commercial mortgage-backed securities (CMBS) loans across all property types are experiencing delinquencies. Furthermore, the volume of CMBS loans maturing will rise each year through 2017, according to Foresight Analytics, an Oakland, Calif.-based market analysis and forecasting firm.
Despite the growing number of firms looking to get a piece of the business, in reality there have been few opportunities to date. That's because banks so far have shown a reluctance to actually foreclose on properties. Instead, lenders are granting forbearance—delaying foreclosure—with the hope of working out a solution or giving borrowers time to refinance or flip properties.