By Al Barbarino
Today’s equity and debt markets face a level of intensified scrutiny that was all but absent during the peak of the market, industry leaders say.
Speakers at Bisnow’s 2nd Annual investment Summit at the New York City Bar Association in Midtown last week (Thursday) said that while the industry is showing some signs of a rebound, albeit a lumpy one, managers and lenders are seeking an unprecedented amount of control over deals.
“People are looking to cover themselves to make sure they don’t get screwed,” said Michael May, senior managing director at Cantor Fitzgerald, which has closed 100 financings worth $1.5 billion. “One of the biggest changes that we’ve seen is a heightened focus on guaranteed situations,” especially on development deals.
Clarifying who will be indemnified is particularly important when considering the complexity of deals that could at any time falter due to a buyout, removal at the executive level, or other unforeseen event, May said.
Managers demand more control, underwriting is extremely stringent, and the focus has shifted in many cases to deals that are bullet proof, panelists said. Lenders are spending much more time assessing borrowers. And investors and sponsors are being asked to come up with a greater portion of equity on deals, as they reconsider deals that once seemed to make sense.
“The leap of faith that investors would make sometimes make in 2006, 2007 and the beginning of 2008 just take deals away from somebody else really isn’t in the market anymore today,” said Simon Ziff, president at Ackman-Ziff Real Estate Group, who has structured $25 billion debt and equity financings for real estate developers.
In New York City, the meat of the market remains in value-add properties, particularly in the multifamily, office and hospitality sectors. But with a tremendous amount of capital needed for new construction projects, it’s wise to be leery of deals that seem to stretch the reality of the market.
“In order to do deals with preferred sponsors that we feel are capable… we’ve come up with a structure where we bridge equity for a period of nine to 12 months” to cover for an event where the “sponsor is unable to achieve certain hurdles,” said Matt Dicker, AVP at Canyon Capital Realty Advisors, which has completed over $5.1 billion of investments involving commercial real estate and mortgage assets. “That has worked well for us in the city.”
During the market’s heyday, investors and firms knew little boundaries when it came to investing in diverse property types. “Correlation went to one,” as money poured into these investments, said Brahm Cramer, co-chief investment officer and co-head of the real estate group at Alliance Bernstein, a global investment manager with $420 billion in assets.
“If you look at what people were investing in in 2008 and what was financeable, it was pretty much anything,” Brahm Cramer, co-chief investment officer and co-head of the real estate group at Alliance Bernstein. “You could readily finance gold courses and hotels, but all of that obviously started to change in 2009 and 2010.”
As the markets ease up, however, investors are beginning to cautiously branch out beyond core assets and into secondary and even tertiary markets, where the higher risk could reap the greatest rewards, panelists said.
On the debt side, lenders are equally guarded, screening borrowers more rigorously than they have in the past.
“We’re spending a lot more time looking at sponsors and borrowers than we ever have,” said Michael May, senior managing director at Cantor Fitzgerald. “The time we spend with every borrower is probably five times what it used to be.”
But other providers aren’t quite so stringent.
“If they’re bad guys we’ll avoid it,” said Steven Schwartz, managing director of loan acquisitions and originations at Torchlight. “But, frankly, if anything short of that, we’ll underwrite the crap out of it.”