Source : The Business Times, March 10, 2009

(NEW YORK) Ted Leary's retirement was short-lived. After saying good-bye to real estate in 2005, he headed for the golf course, but the collapsing commercial property market interrupted his game.

A career that began in the 1970s with the rehabilitation of soured real estate investments had come full circle. 'Suddenly, at the tender age of 64, people are calling me because there aren't many workout people around,' he said, referring to the art of solving problems linked to troubled real estate.

As more deals run into trouble, grizzled veterans with a broad range of knowledge in finance, law, property management and relationship management - along with keen negotiation skills - will be in demand.

'You sort of put that whole mix together, you've got yourself someone that's going to be sitting pretty in terms of being able to step into what are going to be increasingly difficult times,' said Anthony LoPinto, chief executive of real estate executive search firm Equinox Partners.

Mr Leary learned workouts during the 1970s real estate bust.

His firm, Crosswater Realty Advisors, counts Victor Palmieri, one of the first US turnaround specialists, as one of its senior advisers. The firm represents large institutional investors at odds with pension fund advisers, who derive fees from the value of assets that are now declining rapidly.

All of the firm's senior board members, except for one, are over 60.

'I call it the senior adviser group because at least a couple of parts of your body have to be sagging,' Mr Leary said.

US commercial real estate values were on a steady ascent in the 15 years to their peak in 2007.

'We've had a whole generation of people in our business that have never seen anything but numbers that get better,' Mr Leary said.

But the era of the high- leverage deal ended abruptly and debt financing, the life-blood of the industry, has slowed to a trickle. The sector is in a steep downturn, with sales drying up and values falling.

More than US$737.4 billion in mortgages are expected to come due in the next five years, according to the Mortgage Bankers Association. Meanwhile, US property values are likely to have fallen roughly one-third from the peak levels of 2007, according to Prudential Real Estate Investors, more evidence that many borrowers may not be able to repay old mortgages with new ones.

That means the sector will need people with experience in workouts - the process of financially and legally solving problems related to broken loans, orphaned properties, disgusted investors and byzantine debt structures - all done within the context of an overall economic mess.

'The word workout comes from 'we have a problem, we have to work it out,' said John Peters, principle of real estate recruitment firm Peters & Associates.

Banks, financial firms, investor groups and special servicers, which oversee distressed loans supplying cash to pools that pay commercial mortgage-backed securities (CMBS) obligations, are soon expected to hire or contract people to handle what looks to be a barrage of workouts.

Many of the workout professionals will be alumni of the Resolution Trust Corp, which the US government created in 1989 to help sell off distressed real estate held by collapsed banks, thrifts and savings and loans institutions.

But this time the problems will be more complicated and expansive than in the 1990s. Many of the loans and properties are held by companies that are still in business. Extracting the toxic loans without killing the host will be tricky.

'Back then assets were harvested from a cadaver. In this case, it's living organism,' Mr Leary said.

Secondly, more than US$700 billion of senior mortgages outstanding are in CMBS, with US$25 billion maturing in 2009 and US$40 billion to US$50 billion per year between 2010 and 2014, Prudential said.

That means many different investors lay claim to the cash flow of the same mortgage.

'That's one of the big differences between this period and the period of the early '90s,' Mr LoPinto said. 'If you look back at it, the exit strategy of the early '90s debacle was securitisation. This time around, the unwind is going to be the unwind of securitisation.'

The delinquency rate for CMBS loans soared to about 1.63 per cent in February from 0.6 per cent in September, when the credit crisis escalated, according to Deutsche Bank.

It could reach 3.5 per cent by the end of 2009 and 6 per cent by the end of 2010, depending on the credit markets and the economy, said Richard Parkus, Deutsche Bank's head of CMBS research.

Most of the trouble lies with borrowers who can meet monthly interest payments but can't refinance the principle because credit markets have shut down.

'The loans in bank portfolios are a lot worse than the loans in CMBS,' Mr Parkus said.

Further, there are the mezzanine loans and preferred equity that were used to finance property investments.

'The complexity of the debt-structure level has gone up 100 degrees,' said Keith Belcher, JE Robert Cos managing director and head of its CMBS special servicing division.

But younger, less experienced people will still be able to find a place in the workout workforce.

'They're not all going to be 50-year-old grey-haired guys,' Mr Belcher said. 'They're going to need a support group that's going to give some young people, some relatively inexperienced people, help to learn the business along the way.' - Reuters

Source : The Business Times, March 10, 2009

This could stimulate demand when economy stabilises

(NEW YORK) Houses in the United States are now more affordable than at any time in the last 40 years when compared with personal income.

Only a couple of years ago, home prices rose to clearly unsustainable multiples of income, and the abrupt change could hold out hope for a revival of the housing market.

Cheaper: Many sales involve homes that are in or close to foreclosure, and may have been at prices lower than the asking price for others in the area

In the summer of 2005, when funny-money mortgages were readily available and helping to drive up home prices, the national median sales price of a home was almost eight times as much as the average per capita after-tax income of Americans.

But by this January, with incomes up and home prices down sharply, that multiple had fallen to less than five.

That may be little comfort for many homeowners who owe more than their homes are now worth, but it does indicate that home prices have fallen far enough, at least in many areas, to make them affordable.

'You have a big debt overhang problem, but you don't have a house price problem anymore,' said Robert J Barbera, the chief economist of ITG, an advisory firm.

Home prices vary widely from region to region, and people in areas like New York or Los Angeles can only dream of finding an acceptable home for US$169,900, which the National Association of Realtors says was the median sales price of previously owned homes sold in January.

That figure was down from a peak of US$230,900 in July 2006. It is not clear that prices have declined enough to make houses broadly affordable in some regions.

National median prices can be misleading, particularly because more or fewer sales may be coming from high-cost or low-cost areas.

Moreover, the volume of home sales has plunged. Many recent sales involved homes that were in or close to foreclosure, and may have been conducted at prices lower than the asking price for other homes in the area.

But it is also possible that the decline in the median price may understate the devastation that has befallen the housing market in some areas. In December, the latest figure available, the S&P/Case-Shiller composite home price index for the 20 regions was off 27 per cent from July 2006.

The personal income figures may also be high, since they are affected by government transfer payments and include significant increases in Medicaid and unemployment insurance payments. But the trend is the same even with transfer payments eliminated from the calculation.

Pressures are still forcing home prices down, including the difficulty of obtaining mortgages for prospective buyers who cannot meet the standards set by Fannie Mae and Freddie Mac, the government-controlled agencies that finance the bulk of new home loans.

In addition, there was a lot of overbuilding in many areas, and even though construction has plunged, the inventory of unsold homes has stayed stubbornly high. Rising unemployment may discourage some who could buy from doing so.

But at least by one measure, home prices no longer appear to be high by historic standards. That fact could help to stimulate demand, if not immediately, then at least when the economy appears to stabilise. -- NYT