| NEW YORK
NEW YORK A bankruptcy by Lehman Brothers may prompt the sale of its $32.6 billion of commercial real estate investments, and that just may be the jolt the U.S. property market needs to get sales started again, some real estate executives said.
But the elusive bottom that buyers and sellers have been waiting for could be short-lived and be followed by an even greater fall in prices until new lenders step in to fill the void left by the retreat of large banks from the market.
"There's a whole group of people looking to be vultures to pick Lehman's bones," said Jay Rollins, president of Denver-based JCR Capital, a boutique commercial real estate capital provider.
"The other half of the story is what's left of the financial infrastructure that's going to be in place to do transactions," he said.
Lehman Brothers was teetering on the verge of bankruptcy early on Monday after Britain's Barclays Plc withdrew from talks to take over part of Lehman.
As of August 31, Lehman held $32.6 billion in commercial real estate loans and equity. Most experts expect that under U.S. bankruptcy procedures, the investments will be sold slowly and not unloaded onto the market in one fell swoop.
"Once it goes into bankruptcy, there will be a lot of people with their hands all over the place," said Barry Gosin, CEO of real estate services company Newmark Knight Frank.
"It becomes a much more cumbersome process."
But the sale of so many real estate investments may help set values of similar assets and break the standoff between potential buyers and sellers.
"I think it could very well be the moment when the spreads are wide enough for the money players to come in and say, 'OKnow the returns are good enough for us to go in and invest,'" Gosin said.
ALL EQUITY MARKET?
Historically, debt typically makes up more than half of real estate transactions but had accounted for more than 90 percent of many deals in 2006 and the first part of last year -- the top of the recent real estate market boom.
Much of that financing for those deals was supplied by large investment banks, such as Lehman, and by the securitized market in which investors bought bonds backed by the loans.
But the securitization sources -- commercial real estate-backed securities (CMBS) and commercial real estate collateralized debt obligations (CRE CDOs) -- have just about disappeared, and financial institutions have recoiled.
"If this ends up feeling like an all-equity market, things are going to continue to decrease," Rollins said.
"Part of the story is we wiped out a large part of the financial infrastructure that supports real estate."
Private capital is going to step in and fill the void, Rollins said. But these small providers of debt won't be able to finance large deals by themselves.
"You're going to have to have club deals," he said.
"This is how the business was done in the '70s in the '80s before securitization. That's how its going to have to work again for the short term.
Lehman is also an renter of office space.
Some of its landlords, such as Boston Properties and Paramount Group, stand to lose the most.
A company that has filed for Chapter 11 bankruptcy protection is allowed to walk away from a lease.
Lehman Brothers is Boston Properties eighth largest tenant, with 436,723 square feet of rented space, accounting for 1.48 percent of the real estate investment trust's portfolio, according to Boston Properties' annual report.
Paramount recently bought 1301 Avenue of the Americas in New York from Deutsche Bank, which took back the property when real estate magnate Harry Macklowe defaulted on a more than $5.8 billion in debt.
(Reporting by Ilaina Jonas; Editing by Ted Kerr)