ICSC: International Council of Shopping Centers

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Property values must trough before recovery can begin, conference told

The commercial real estate markets will not rebound until buyers and sellers agree on prices. In the meantime, vast amounts of debt and equity will continue to sit on the sidelines, executives said Thursday at the ICSC Capital Markets Conference, in New York City.

The Treasury’s recent loosening of restrictions on when and how loan servicers can modify loans and the ongoing TARP program’s offer of incentives to investors willing to take a risk on commercial-mortgage-backed securities are insufficient to revive the market by themselves, they said. Banks and institutional investors will need to take the tough step of realizing losses and offloading the billions of dollars worth of distressed commercial real estate mortgages sitting on their balance sheets, said Scott Zucker, managing director and head of loan originations at New York City–based Natixis Real Estate Capital.

“Commercial banks especially are carrying huge amounts of commercial real estate they need to roll,” Zucker said. And the number of troubled loans held by banks is growing steadily as more borrowers are giving up on paying their mortgages and handing their properties back to the lenders, added Richard Walsh, managing director of New York Life Investment Management. “More lenders are having to write assets down and reclaim them because the cash flow has fallen so much that landlords feel they are just feeding the beast for the lender,” Walsh said.

Once banks and other lenders have accepted the losses on these mortgages, they can reset rents and other costs associated with the property and force neighboring shopping centers to do the same in order to avoid losing tenants, Walsh said. “This process will eventually make market rents go down,” he said. “It will be the beginning of the process of setting a new clearing level.” Prices will not reach their trough until 2011 or 2012, predicted Timothy Zietara, a senior director and manager at New York City–based ING Clarion Capital.

Life insurance companies will probably be the first investors to start offloading distressed mortgage investments, because their primary motivation is to maintain high credit ratings, said Guy Johnson, who heads Irvine, Calif.–based Johnson Capital. “Look for them to be selling loans at fire-sale rates.”