Since leaving Mayor Bloomberg’s administration last summer, Bob Lieber has stepped from government to the front lines of the real estate downturn.
Speaking at a breakfast yesterday in Lower Manhattan hosted by New York Law School’s Center for Real Estate Studies, Lieber discussed how Island Capital Group, the real estate investment firm he joined after working as the deputy mayor of economic development for two years, has positioned itself to take advantage of the wave of distress he still expects will hit the market.
While both commercial rents and real estate values in Manhattan have begun to rebound from the downturn, cities elsewhere in the country have had to grapple with persisting effects from the recession, including high unemployment and weak economic growth that has left festering vacancies and diminished property values.
Lieber pointed out that about $2.5 trillion of real estate debt, comprised of both securitized and balance sheet loans, that was originated during the boom years of 2005-2007 is set to soon begin coming due because commercial real estate mortgages are typically placed against properties for increments of five, seven, or ten years. When this debt rolls over, Lieber reiterated concerns that have echoed since the downturn began in the commercial real estate industry that there will be a wave of defaults as overleveraged landlords struggle futilely to replace oversized loans on their property.
“Are we really through the great recession or heading for things that are even worse?” Lieber asked. “Is the big wave of the maturity bubble, or the big part of the rat going through the snake, in front of us?”
Lieber appears to be banking on rough times ahead, and positioning himself to capitalize on it. Last year, Island Capital bought the real estate securitization company Centerline Capital Group out of financial distress, inheriting a large portfolio of securitzed loans for which the firm acts as a special servicer. Lieber said that the company is the servicer on about $120 billion of commercial mortgage securities, making it as big as the well known servicer LNR. About 70% of that debt was placed during the period between 2005 to 2007 Lieber said and Centerline expects about half of it to eventually go into default.
Already $14 billion of the Centerline’s portfolio of special servicing assignments is in default Lieber said and the company expects $25 billion of the loans to be in default within the next two years. The portfolio comprises about 13,000 loans tied to roughly 15,000 properties “in all parts of the country and in all the major food groups,” Lieber said.
“We think the bulk of activity is in front of us, not behind us,” Lieber said. “I am excited at the opportunity, there have never been better times for people to find clever ways to make money.”
Although defaults can mean big losses for the holders of the mortgage securities tied to a loan, the special servicer is an administrative entity that merely negotiates the situation on behalf of the bond holders. Special servicers have become pathways for hungry investors looking to cash in on the problems in the market. Last year, the investment group Fortress bought the biggest servicer CW Capital. The companies are allowed to buy distressed assets from the bond holders they represent at fair market value, a derivation that could offer the servicer a favorable price because the tough times have pushed down the real estate fundamentals upon which values are based.
“There are five or six differrent ways that the servicer is charged with giving liquidty to the trust, sell the loan, work out the loan, modify the loan, or you can buy the loan or you can buy the underlying real estate,” Lieber explained.
When asked if servicers should be required through regulation to keep a financial stake in the mortgage securities they originate so that they would suffer losses along with bond holders in the event the loan goes bad Lieber said, “When you leave it to the political hacks in Washington…it just inspires clever people to circumvent the rules.”
