As deep-pocketed private investors line up to take advantage of a depressed U.S. commercial real estate market, the eventual winners are likely going to be players with the capital -- and the stomach -- to jump in while prices are hitting bottom.

It is too early to talk of a recovery, or even stabilization in a market hit by the double whammy of recession and a dearth of funding, industry experts told the Reuters Real Estate Summit this week.

But CB Richard Ellis broker Darcy Stacom, nicknamed the Queen of the Skyscraper, identified two groups of potential winners in the current cycle. One includes commercial tenants who could lower their occupancy costs by buying a property, and who may enjoy lower rents as leases come due.

The other is investors who stayed on the sidelines during the market upswing and who now have the required capital. Stacom said she has hosted innumerable groups of investors from Asia, South America and Canada looking to buy distressed New York office and residential space, as well as hotels.

When the AIG tower in lower Manhattan came onto the market, it attracted more than 400 bids, including some from current tenants, she said. It was eventually was sold to a consortium of Youngwoo & Associates, a New York investment firm, and South Korea's Kumho Investment Bank (010050.KS: Quote, Profile, Research, Stock Buzz).


Who will be the eventual winners?

It depends on who has the stomach to step in and participate, Stacom said.

Vornado is sitting on a huge war chest. They have the skill set, when the timing is right to hit, they'll hit. The LeFrak family is sitting on a huge war chest. It's really going to be up to them.

Investors could choose to buy individual buildings or entire companies that own lots of them, she said.

A weak U.S. economy has depressed demand for space in office buildings, distribution centers and other commercial properties, and pushed down rents and sale prices, while a freeze up in credit markets makes it hard -- if not impossible -- to fund deals.

The seizure of credit markets over the past year has led borrowers to seek extensions of loans, hoping availability of funding and property prices will improve in the interim.

Commercial real estate lenders have no choice but to extend loans for a year since it would be impossible to sell a property taken away from a borrower in the current climate. That means large banks may emerge as one of the losers.

The real problems from loan portfolios all lie ahead, with the exception of residential, said Deutsche Bank analyst Richard Parkus. (That includes) all of the commercial and industrial, to the extent that they loaded up on covenant-light corporate loans, secured loans. And many banks did exactly that.

The strategy of sitting on loans and waiting out the commercial real estate recession worked for some lenders in the 1990s, notably Citigroup, said Jacques Gordon, global strategist a LaSalle Investment Management. 

But that strategy may not work this time around, since banks are in far worse shape than in the 1990s. Additionally, few banks have the staff needed to manage properties at a time when deteriorating fundamentals increase the debt burden.

And extending loans may just forestall the inevitable hit.

By just extending the loan for another year, it looks like a good strategy today but I would suggest that some of these properties will not be able to carry their debt within the next six to 12 months, Gordon told the Summit.

Eventually, lenders may be stronger and therefore in a better position to write down the value of properties, letting them move either into foreclosure or into the hands of a new private equity buyer, Gordon said. But that process will take at least 12 months to get started.


Deep-pocketed private capital investors are lining up but are waiting for the dust to clear before they buy distressed debt, offer specialized mezzanine loans, or provide equity, Parkus said.

There are many avenues for private capital to come in and fill what is going to be a massive void in financing. It's not clear why you would buy now when prices are coming down dramatically. I don't think that they will come in for another 12 months or so.

A major concern for property owners is that new buyers of distressed assets will lower rents, in another blow to values.

Tom Shapiro, founder of GoldenTree InSite Partners, noted that a lot of money is on the sidelines.

There are starting to be amazing opportunities out there, Shapiro said, adding that some of the most attractive deals right now involved recapitalizing existing projects.

Capital is king and it's very hard to raise money right now, he said. Even if you have the best intentions and an incredibly talented team, if you try to raise a U.S. fund right now, it will take twice as long as you'd be lucky to raise half of what you did before.

Deutsche Bank's Parkus also said he saw opportunity -- eventually.

Anybody who really knows anything about commercial real estate realizes that the next five to 10 years will present a world of opportunity, he said.