I read an interesting article where three of the most prominent professionals in real estate shared their thoughts on the challenges facing commercial real estate. Held in April, 2009, during the 14th Annual REIT Symposium, hosted by the NYU Schack Institute of Real Estate, real estate leaders — Mack-Cali’s William L. Mack, Vornado’s Steven Roth, and Equity Group Investment’s Sam Zell — frankly assessed the excesses of spending and loose valuation of properties in the past few years and asserted that current values, particularly in the public market, have fallen below any rational analysis.

Some key highlights from the discussion include:

U.S. Growth Forecast

The government incentives will eventually entice small businesses to jump in the game. Additionally, the lack of regulation in the U.S. compared to other countries will still be an instigator. Another key ingredient is the growing U.S. population as opposed to many other countries. Roth explained, “The seeds of the next cycle being born are upon us, but the timing is an enormous outstanding issue.”

“Survival of the Fittest” REITs

The fall of the private commercial market has yet to happen. And, the group subscribed to a “Darwinian” point of view about REITs: of the 240 that exist, “maybe 15 or 20 are relevant, and the rest aren’t and have to disappear,” said Zell.

Ownership, Yes; Workouts, Not Yet

As loans come due and owners attempt workouts with lenders, Roth explained that “a lot of these loans will be sold into aggressive, hostile hands before they get to maturity so the private landlord is going to find out he has a different lender than he thought he had.” Some of the debt players may choose to own the underlying assets rather than do workouts with owners.

There is no denying that the remaining months of 2009 for the commercial market will hurt some owners and investors, but will provide promising alternatives and opportunities for others. What side will you be on?

Invest well.


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