Some of the largest brokerage houses in the country — Cushman & Wakefield, Colliers International and CB Richard Ellis — have spent the past two years mining their in-house expertise to build asset recovery groups. Today these specialty practices are beginning to work through the billions of dollars in distressed assets and debt expected to weigh on the market over the next few years.
Roughly a third of Colliers International’s deal flow involves some form of troubled assets or distraught property owners. CB Richard Ellis reports that it is in the process of selling more than $5 billion of distressed assets, and the company is a receiver for another 20 million sq. ft. in commercial properties. Meanwhile, Cushman & Wakefield acts as receiver for as many as 25 distressed properties, predominantly in the office and/or retail sectors.
The top firms have closed ranks to assemble their most experienced executives — many of them veterans of the Resolution Trust Corp. (RTC) era — across a broad spectrum of services and geography.
On a basic level, these companies are acting as receivers for distressed assets, which require them to collect rent, pay bills and stabilize properties before they are sold.
The real value
But on a much more critical level, brokerages are working with over-burdened special servicers, banks and other lending institutions as experienced advisors. In this role, brokers coach these “accidental” owners on what they have and what it’s worth, and then provide a roadmap that points the way to the most prudent and fiscally sound exit strategy.
“Oftentimes the special servicers or the servicers don’t necessarily understand what they have, so you need someone who can act in a fiduciary role,” explains Dylan Taylor, chief executive officer and chairman of Colliers International based in Seattle.
The full-service brokerage is owned by Toronto-based FirstService Corp. (Nasdaq: FSRV) and is the by-product of a recent merger between Colliers International and FirstService Real Estate Advisors. Colliers’ distressed-asset service model is called CART, or Colliers Asset Resolution Team.
“The CART organization manages relationships with the six to eight special servicers,” says Dylan. CART provides services such as appraisal and property valuation, portfolio assessment and stabilization, and sale of individual assets.
But not all distress is created equal. “We’re seeing a difference in the quality of the assets by product type,” he says. “Most of the assets coming back in the office space are good assets with respect to the level of distress. There’s a clear path to stabilization.”
Retail and multifamily distress assets fall into another category, however. Many of these properties have values that are 40% to 60% below current debt levels. These are the products of “busted deals,” in which the projects are partially finished and no clear exit strategy exits.
Not an RTC revival
Because today’s distressed real estate market continues to be complex and uncertain, there has been a high demand for the services and know-how of brokers and other professionals who lived and worked through the savings and loan crisis of the1980s and 1990s.
“In the RTC days, the government was a lot more aggressive in getting property on the market,” recalls Frank Liantonio, executive vice president for New York-based Cushman & Wakefield’s capital markets group. Liantonio has worked at Cushman for 29 years and is responsible for U.S. transaction activity and oversight of the brokerage’s resolution group.
In the 1980s and ’90s, the U.S. government was less concerned with price and more concerned with resolving troubled assets. The government and institutions now warily recall the huge profits made by investors who acquired distressed assets, and don’t want to take similar hits to their balance sheets this time around, he explains.
“Today there’s been much more control over the process [with] commercial banks domestic and foreign,” says Liantonio. “Most institutions have not wanted to take the hits on their balance sheets based on what properties could fetch.”
Greater control by government and lenders in terms of how troubled properties and notes are released onto the market staved off the expected flood of distressed assets last year. Like a weather warning that fizzled, the storm never arrived. Or was it just delayed?
The ripe time
Despite some successful resolutions of distressed situations through tactics such as extensions and workouts for loans backed by core properties in 24/7 markets, distress is coming from a number of sources. Those include big commercial and small community banks, and special servicers who are charged with resolving troubled assets backed by loans rolled into commercial mortgage-backed securities (CMBS).
“We do see an uptick in both loan sales and REO (real estate owned) activity in 2010 from a whole host of institutions, probably more banks on a percentage basis than we saw in the past year,” says Spencer Levy, a senior managing director who heads up the recovery and restructuring services group for Los Angeles-based CB Richard Ellis.
Because banks are now healthier, they have the ability to dispose of assets at levels that might have been too damaging to their balance sheets last year, Levy adds. And big banks have real estate departments and the ability to hold assets for up to 48 months if necessary.
The same scenario, however, does not apply to many community banks. “Community banks have different dynamics completely,” says Levy. “They in some cases have up to 40% of their total holdings in commercial real estate, and it’s sort of ‘fix it or perish’ in a lot of cases.”
Overburdened special servicers are also resolving more assets. For example, 11 of the top 15 loans by volume of realized loss balance were recorded in the fourth quarter of 2009, according to New York-based researcher Trepp LLC.
Liantonio says special servicers often ask Cushman & Wakefield to provide broker opinions of value so they can evaluate their position with respect to a particular asset.
“Many assets moved into special servicing over the last 12 to 18 months, and we’re seeing more decisive action today on the part of special servicers than we did six months [or] 12 months ago,” Liantonio observes. “There’s clearly more activity, but the floodgates have not opened.”
Pinpointing when the largest number of distressed assets will hit the market has become almost something of a pastime in the industry. For instance, Taylor of Colliers projects a peak this summer with a long tail through 2012.
While brokerage experts differ on the timing, they all agree that there’s insufficient capital and insufficient value in commercial real estate to refinance a lot of the billions of dollars in debt coming due over the next few years. That will mean even more REO to burden lenders and a greater need for brokerage services.
That magic moment of capitulation? “It’s unclear whether we’re going to get there,” says Levy of CB Richard Ellis. “There are too many incentives in place for folks not to trade — not just balance sheet-related but also accounting and market-related. A lot of these banks and special servicers have the ability to hold on longer this time than in the early ’90s, and they’re going to.”
Sibley Fleming is managing editor.