Former Florida Governor Jeb Bush is convinced that the absence of an entity like the Resolution Trust Corp. is hindering a recovery in U.S. real estate markets. Bush was one of many speakers at the first annual Innovative Real Estate Strategies conference in Palm Beach Gardens, Fla. The conference, sponsored by Financial Advisor and Private Wealth magazines as well as Robert A. Stanger & Co. LLC, drew about 250 advisors and real estate professionals.
The RTC was a market-based solution created in 1990 to get bad assets off the balance sheets of banks during the last major U.S. real estate downturn. Bush noted that in Florida in particular, bad real estate loans are resolved through the courts, not the markets or arbitration. Given that Florida was the center of the real estate bubble, a huge backlog of foreclosure cases there is straining its court system.
But conference panelists also noted that amid the aftershocks of the real estate bubble crash around the world, opportunities have arisen in commercial properties in the form of distressed properties, foreclosures and short sales. And global capital has shifted to seize these opportunities. Middle Eastern investors, for instance, have begun diversifying out of their own increasingly unstable region to find properties in places like London.
Glenn Mueller, professor at the Franklin L. Burns School of Real Estate and Construction Management at the University of Denver, told attendees that now is an excellent time to consider investing in commercial real estate. He also urged advisors to counsel clients not to view their homes as investments. Individuals should think of their home as a use asset like a car," Mueller said.
According to Marc Halle, senior portfolio manager and global head of Prudential Real Estate Investors, China and certain other emerging markets have recovered completely and look poised to grow. "China is a very good allocator of capital," Halle told attendees. "The U.S. market will pick up in two or three years."
In core U.S. markets, where institutional investors were withdrawing nearly $1 billion in capital a quarter six months ago, they are now investing about $1 billion a quarter to position themselves for an upturn, Halle said.
The absence of virtually any new construction over the last three years and the lack of much building being planned for the next few years should give commercial real estate owners lots of pricing power and the ability to raise rents in many markets, according to Mark Earley, president of Hines Real Estate Investments. In some markets like New York, Washington, D.C., Chicago and especially San Francisco, Earley is not seeing a lot of depressed prices, and in some cases, prices have returned to or exceeded pre-crisis levels.
The widespread popular perception that real estate will never recover amused Brian M. Conlon, president of Inland Real Estate Investment Corp. In the late 1980s, people said there was so much excess supply of real estate in Dallas it would never be absorbed in our lifetime. In actuality, it took less than a decade.
At the same time, changes in the players in real estate finance are likely to produce continuing dislocations going forward. "All the money that went into the CMBS (collateralized mortgage-backed securities) market needs a new home," Halle said.
And if a quarter trillion in debt can't be refinanced, some real estate properties could head south in value. "Banks are not good stewards of capital in real estate," Halle noted.
Despite myriad dislocations, some experts saw the chance to capitalize on structural anomalies in the business. Dan Wildermuth, CEO of Kalos Financial, noted that many non-traded REITs are approaching the final phase of capital raising. "You can see what's in there. You can see what cap rates are," Wildermuth continued. "They will revalue in 18 months and clients like revaluations."