first time in nearly two decades. After an unprecedented meltdown,
housing values should finally hit bottom during the year, followed
by later correcting commercial sectors.”
The problem in the commercial property market is the same
as everywhere else in real estate. There’s simply no financing out
there. “Lack of money is key,” says Jim Hughes, a real estate partner
with Greenberg Glusker in Los Angeles, who does a lot of work
in distressed assets and multifamily residences. “Without the availability of credit we’re all holding our breath.” Capital is the oxygen
of real estate, Hughes notes, adding, and “you can’t turn off the
oxygen for too long before you do tremendous damage to the real
estate industry.”
Patrick Benton, president of Lee Investment Services Group,
agrees. “Financing is still the biggest constraint, followed by buyers’ and sellers’ expectations. I think 2009 will be slow, but I think
the gap between the two will begin to shrink,” he says.
with the federal government’s takeover of Freddie Mac and Fannie
Mae, “This thing could conceivably get out of hand very quickly.”
Ziman, who wasn’t entirely pessimistic, said “I think this is also an
opportunistic time.” Referring to AVP, he said, “We are what’s called
a real estate fund of funds,” and that “We are investing with underlying funds of anywhere from $100 million to $300 million.”
Ziman said AVP plans to go back to market and try to raise $1
billion to $1.5 billion, “and that’s just domestically.” Currently the
firm is looking at all property types and opportunities in industrial,
office, hotels, distressed debt and distressed real estate, he said.
“SALE IS NOT A VIABLE OPTION”
Thomas Barrack, founder of Colony Capital in Los Angeles, had
this chilling news about commercial real estate in his Oct. 27 newsletter to investors: “The overriding problem for all refinancing
issues is that sale is not a viable option. Transaction volume is dwindling; to date, retail center sales volumes are down 85%, office is
WHAT LIES AHEAD? down 75% and hotels, 95%,” Barrack wrote.
Before anything much happens, “There are no lenders to fi-though, Hughes says investors nance so you’re going to have a
will want to get an idea of what significant shortfall, therefore,
lies ahead. Therein lies another that’s going to cause a lot of prob-problem. Because financial insti- lems,” Doupé says. “These prop-tutions themselves lack a game erties will come into some sort
plan and government policy of default and that’s where we’re
seems to change without warning, positioning ourselves.” Of the
it is difficult for investors to chart distressed properties that seek to
a course. recapitalize, Doupé predicts the
Hughes says this uncertainly will majority will fail.
keep the real estate industry in sta- And some experts believe the
sis for at least the next few months coming downturn is just an early
while all eyes are on Washington. step and will eventually make the
He says that investors will have slump in the early 1990s look mild
to wait and see how and whether by comparison. “The early per-the federal bailout funds, which Koll Center 3, a 188,374-square-foot, mixed-use R&D/office business spective was it would be a bump
have to date stayed in the upper park located in Irvine, is 60% sold since construction was completed in the market and it would come
tiers of financial institutions, are in August. back,” says Matt Sullivan, founding
eventually distributed throughout principal and managing director
the market. The industry will have to wait for the inauguration at Lee Investment Services Group. “Another is that this is a long
of President-elect Barack Obama and his administration to learn road—three to five years. I once believed in the former. Now, I’m
the policies they will adopt. It will have to wait to see whether and more pessimistic.”
how much other industries in need of financial help will dilute the There are lenders out there, but they are cautious. Gerald
amount and impact of funds to real estate and banks. Only then Ducot, co-founder and co-managing director of Lone Oak Fund
will the market begin to move, Hughes predicts. “Until federal in Los Angeles, which specializes in bridge loans, is getting plenty
funds hit Main Street, you’re not going to see any changes because of inquiries but has become much more careful in lending. “We’re
there isn’t any liquidity out there.” much more conservative,” says Ducot.
Richard Ziman, founder of Los Angeles-based Arden Realty Inc., Gone are the days when Lone Oak would make 65% to 70%
had similar bearish comments. “I didn’t think it would get as bad as loan to value offers. Now 50% is the standard. In addition, Lone
this, I’ll be honest with you,” Ziman said in September at the first Oak has followed the trend of raising capitalization rates from
annual Allen Matkins Real Estate Symposium-View From the Top 6.5% to 7% to between 7% and 8%.
event in Century City (visit http://www.globest.com/news/1240_1240/ Meanwhile, investment funds have been on the sidelines rais-
losangeles/ 173654-1.html for the full story). ing massive amounts of capital to seize deals at rock-bottom prices,
As the source of his concern for the economy, Ziman, chairman often going off the market to unadvertised sources.
of AVP Advisors LLC, pointed to the “$74 trillion of derivatives out Ducot believes when these funds enter the market it will be in a
there,” rising unemployment and the mortgage-related economic big way. “They’re in a different world. They’re buying $100 million
problems. “I think this is the worst meltdown in the financial arena and $1 billion,” Ducot says. “Then they sell off in increments. The
since the Great Depression,” he said. To add to this, Ziman said he $20-million increments are the ones we’ll see.”
doesn’t see a turnaround until the first quarter of 2010 and that Ducot predicts most of those funds believe the bottom has yet
