If counting the number of new resolution or receivership programs announced by majorfirms in recent weeks is any indication, commercial real estate owners and investors are facing some serious challenges ahead.
Cushman & Wakefield, CB Richard Ellis, Jones Lang LaSalle and Grubb & Ellis all formally put titles to their new entities. Cushman & Wakefield’s is dubbed “Resolution Group,” CBRE’s is the “Restructuring Services Group,” and Jones Lang LaSalle is offering “Receivership Services.” Grubb & Ellis’s program holds the distinction of the longest moniker, the “Financial Services Asset Management Practice.”
Though each varies in different ways, the common element is providing services packaged under one name to a primary client target — financial institutions.
“As we looked at where the market is today and looked at where our clients were going to have requirements going forward, it is clearly going to be in this whole area of resolving problem or distressed real estate, be it the actual asset or a loan or a portfolio of loans,” says Frank Liantonio, executive vice president of Global Capital Markets with Cushman & Wakefield. “The commercial loan side of the commercial real estate business has been behind the curve as it relates to the residential side and we saw this as an area where clients would have significant needs.”
Liantonio predicts that his group will initially focus on clients that have financed the hard-hit hospitality and retail sectors. And the first priority is analysis. “The lenders and/or the special receivers that are taking these assets back are going to need to understand what it is that they’re getting back. They’re going to need to understand values, to understand options in terms of how they resolve the situation. Each assignment starts out with an analysis of the client’s objectives and what they want to achieve.”
Spencer Levy, senior managing director and point person for CB Richard Ellis’ restructuring services group, says the initial focus will be on workouts in residential, land and development. “The problems have not crept into the core asset types yet. Certainly if fundamentals continue to weaken and the capital market conditions stay pretty much shut, it will eventually creep into the core asset types. We are following the trail of distress and we will go with it,” says Levy.
Recently the Federal Deposit Insurance Corp. (FDIC) selected CB Richard Ellis as its primary advisor to manage, lease and dispose of the real estate assets that it holds as a receiver for failed financial institutions. One of its main clients, IndyMac Bank, was taken over by the FDIC in July 2008.
Marcus & Millchap has had a Special Asset Services unit up and running since 2006. To date the entity has completed 1,500 special asset assignments and expects that number to exceed 2,000 by the end of the year. “Distressed properties and portfolios are being well received by private investors so far, and we expect to market a large volume of these properties during the next several months,” notes Bernard J. Haddigan, senior vice president and managing director of the firm.
The bottom line for all of these programs is to broaden services to capture more revenue at a time when financial distress is coming home to roost on the service providers themselves. In some ways, these programs serve as a response not only to client demands, but also to the demands of the brokerage business. Consider that sales transactions in the first three quarters of 2008 have fallen by 75% in office, 49% in apartments, 54% in industrial, and 71% in retail versus a year ago, according to New York-based research firm Real Capital Analytics. That doesn’t give transactional specialists much to do these days.
“Quite frankly, we didn’t really need a lot of restructuring skills over the last two to three years,” says Liantonio. “There weren’t a lot of defaults. A lot of our people were focused on the transaction side of the business, either placing debt or equity or selling properties and that’s where the market was. As the market moves into this cycle, skills that we have in house that weren’t deployed because they weren’t needed are now going to be retargeted.”
How will these new programs gauge their success, since none are divulging hard revenue projections? “I couldn’t begin to put a number on it in terms of volume of transactions or revenue,” says Liantonio. “We’ll know it’s a success when we clearly see a meaningful volume of activity.”