Rising borrowing costs and anemic economic growth are hindering investments in U.S. commercial real estate, said panelists at the Bloomberg Dealmakers Summit in New York today.
“In the last 60 days, it’s really slowed down,” Related Cos. President Jeff Blau said at the conference. “People are throwing term sheets around, but I don’t think anyone’s really closing deals.”
Property deals have been scuttled or slowed by upheaval in the $600 billion market for commercial mortgage-backed securities, the financing source that fueled record property purchases from 2005 to 2007. A slowdown in the U.S. economic recovery and concern the European debt crisis may worsen have weighed on financial markets. The Dow Jones Industrial Average slid 6.4 percent last week, the most since October 2008.
The slump has benefited investors looking to buy distressed assets, said Barry Sternlicht, chairman and chief executive officer of Starwood Capital Group LLC in Greenwich, Connecticut, and of real estate lender Starwood Property Trust Inc. (STWD)
“We’ve seen much more realistic sellers the last 60 days,” he said.
U.S. regions are recovering at different rates, the panelists said. New York commercial real estate has seen a “pretty remarkable bounce-back to historic highs of 2007” while much of the rest of the U.S. hasn’t recovered amid a weak economy, Blau said. “There is New York, and there’s the rest of the country.”
“The great bulk of assets haven’t participated” in a recovery, said Dune Real Estate Partners LP CEO Daniel Neidich.
Real estate investors are concerned the U.S. economy may enter another slump, Sternlicht said. The market is at an “inflection point,” he said. “There’s no question commercial banks are taking one step back. They got too aggressive.”
Banks still have troubled loans to deal with and want to shrink the amount on their balance sheets, said Neidich of Dune.
“They’re all still scared,” Neidich said.
Wall Street has arranged about $25 billion in sales of bonds tied to offices, hotels and shopping centers in 2011 through last week, compared with $11.5 billion in all of 2010, according to data compiled by Bloomberg. Offerings have tumbled from a record $234 billion in 2007.
Outside the U.S.
Some U.S. real estate investors are chasing deals outside the country as domestic growth stalls.
“You can’t ignore those markets, given the slowdown in the U.S.,” said Blau, whose company has opened offices in Shanghai and Abu Dhabi and is considering adding one in Brazil. Related Cos. is developing a building for the new stock exchange in Abu Dhabi, including two office towers and 800,000 square feet (74,000 square meters) of retail space, he said.
For investors specializing in distressed assets, the U.S. and Western Europe offer better opportunities than the faster- growing economies of Brazil, Russia, India and China, Neidich said. It’s possible to buy real estate in the U.S. and Western Europe at “significant” discounts to building new, he said.
Starwood Capital likes India for distressed assets after the foreign capital that came in during the boom fled the country and property stocks tumbled, Sternlicht said.
‘Like That Market’
“There is distress in India,” he said. “We like that market because no one else is there.”
Starwood, which has an office in Mumbai, has made two investments in India. One is a partnership with Vornado Realty Trust (VNO) that built a 640,000-square-foot Mumbai office building and is selling half of it to a foreign bank, Sternlicht said.
In Japan, Starwood closed its office after making 17 investments and generating an internal rate of return of 37 percent, he said. Japan’s aging population makes it hard for the country to generate growth, he said.
“Japan is really a problem,” Sternlicht said. “If you think Greece is a problem, if Japan ever had to compete for capital on a world basis, they’re bankrupt. They make Greece look pretty fiscally responsible.”
The U.S. has economic problems as well, said Blau of Related Cos. At a dinner last night hosted by an Arab bankers group, the head of a Middle Eastern sovereign wealth fund told the crowd of about 600 that his pool no longer considers U.S. Treasury securities the global benchmark for risk-free investment, Blau said.
House in Order
“It’s a little bit embarrassing,” Blau said. “When you travel around the world, you talk to people. You go to China. They are laughing at us. We need to get our house in order.”
Confidence has eroded as the U.S. deficit burgeoned, partly because of costs to bail out banks during the credit crisis, and gross domestic product growth slowed.
Elected officials have “lost all common sense” and are focused on partisan bickering instead of the nation’s economic challenges, Sternlicht said. “We haven’t solved any of the problems, whether education or national energy policy.”
The 2012 election “is going to take a point off GDP,” he said. Sternlicht endorsed a comment by billionaire real estate investor Sam Zell, who said earlier this month he would support any presidential candidate other than Barack Obama.
“I will go with Sam Zell,” Sternlicht said. “Anything but the current president.”