NEW YORK (Reuters) - Some of the biggest leaders in commercial real estate warned on Thursday that 2008 will be a tough year for the industry, with some owners trapped and forced to sell, creating opportunities for others.
“(2008) is going to be a much tougher environment in which to function,” said Larry Silverstein, chief executive of Silverstein Properties, the developer of World Trade Center site in lower Manhattan.
With an office market of roughly 400 million square feet and larger than the next five cities combined, New York’s woes may be only the tip of the problems other markets are now or are about to face.
As head of company that developed of the Time Warner Center in New York and owns a portfolio of properties valued at more than $15 billion, Steve Ross, chief executive of Related Cos said finding a construction loan today is difficult. Others will find it even more painful and that bodes poorly for those who bought property to develop.
“Land owners in New York bought land and they’re not going to be able to develop it,” Ross said, speaking at the New York University Real Estate Institute 40th Annual Conference on Capital Markets in Real Estate.
The flow of loans used to finance much of the purchase of buildings or to develop has slowed to a trickle of what it was just six months ago.
The commercial real estate credit markets have reached a standstill as investors who readily bought bonds backed by commercial mortgages sidelined themselves. Their fears stemmed from the troubles of the U.S. housing market, as loans to the riskiest borrowers of home mortgages began to default and losses in those bonds started to pile up.
That sent the commercial real estate market into a panic as the prices of commercial mortgage-backed securities — the bonds backed by commercial real estate —- slipped as buyers rethought how safe their holdings were. The uncertainty continues today and buyers are biding their time waiting for prices to settle.
Mortgage lenders used the proceeds from bond sales to lend money to borrowers and now find the well dry.
“When you look at the capital markets, they’re frozen,” said William Mack, founder and senior partner of Apollo Real Estate Advisors, which has more than $50 billion in real estate worldwide.
Apollo is the co-developer of the Time Warner Center with Related.
“We are in for some trouble,” he added.
Some at the conference, such as Barden Gale, chief investment officer for real estate at pension fund advisor ABP Investments U.S. Inc said looming job cuts within the financial sector and more difficult borrowing will translate into sluggish rent growth.
He said rent growth in Manhattan will be flat next year and down 3 percent the year after.
Flat rents and declining building prices will squeeze buyers who financed their purchase with short-term loans when they need a new loan to pay off the old one.
“The distress will come when people will have the need to (take) their property to market and that need only comes when your financing runs out and you have to refinance in the market like this,” Mack said. “There is going to be lots of opportunity around and lot of pain around.”
Investors with a lot of cash will be in a position to take advantage of the pain of others, just as Sam Zell did in the early 1990s when he amassed a fortune in distressed real estate at the bottom of the market. From his purchases, Zell founded Equity Office Properties Trust, which he sold earlier this year, and apartment owner Equity Residential (EQR.N).
The opportunities are starting to come in buying real estate securities whose prices have fallen too low, or by buying the actual buildings themselves, Marc Holliday, chief executive of Manhattan real estate owner SL Green Realty Corp (SLG.N).
“It’s going to tough in ‘08,” Holliday added.
(Editing by Andre Grenon)
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