Barrack: RE workouts are ‘hand-to-hand warfare’

The founder of Colony Capital has clarified his widely reported comment that real estate has become “tiring and boring”, telling PERE that a protracted era of restructuring had taken “velocity, arbitrage and outsize returns” out of the asset class.

Real estate investors will have to work even harder just to achieve single and low-double digit returns, according to Colony Capital founder Tom Barrack.

Barrack spoke today exclusively with PERE following widely reported comments this week that he finds real estate to be “tiring and boring”. Barrack said the comment was intended to highlight a market changed by the credit crisis, in which “the fast guys looking for fast money” are now a thing of the past.

The report had caused some head-scratching among real estate market insiders, who privately questioned whether Barrack was signalling less enthusiasm for the asset class.

Ninety-nine percent of our assets are in real estate, and 100 percent of my life has been real estate.

Colony Capital founder Tom Barrack

However in the interview, Barrack said that his commitment to real estate has never been stronger. “Ninety-nine percent of our assets are in real estate, and 100 percent of my life has been real estate,” he said.

Barrack insisted that amid an era of low interest rates, relaxation of mark-to-market accounting rules, and so-called extend and pretend debt refinancings, real estate had come down to “single and doubles” returns, with “no outsize returns and no velocity”.

“The reality of life is that returns for real estate for the foreseeable future are going to be ordinary not extraordinary,” Barrack said, noting that this view excluded Asia, the Middle East and South America.

As such, he added, there was really only one game in town – with debt the new equity and real estate the new value-add. However, Barrack warned that debt workouts, recapitalisations, restructurings and discounted payoffs were “exhausting”.


“It’s real work,” he said, explaining that for complex, securitised loans in particular an investor could face up to 100 bondholders invested in just one mortgage but “all with different agendas testing waterfall schedules and rules that have never been tested before. All this restructuring is going very slowly,” he said. “Its hand-to-hand warfare and it’s happening at the asset level itself.”

Colony this week closed its second portfolio of loans from the US banking regulator, the Federal Deposit Insurance Corporation, paying $445 million for 1,660 mortgages. The firm, in a venture with the Cogsville Group, agreed to pay 59 cents on the dollar for the portfolio, which has a face value of $1.85 billion and includes loans from 22 failed banks. Unlike many US banks holding real estate assets, the FDIC was the only willing large-scale seller. Instead, Barrack said, many private equity real estate firms were having to search for opportunities among the borrowers themselves.

The Colony founder predicted that inflationary pressures would eventually create more demand for real estate in the US. Once that happened, the “currency of choice will be hard assets”, he said.

“We cannot keep running a $1.5 trillion deficit and printing money to spend our way out of problems without some effect. Money will return to US assets and my instinct is that, for the most part, real estate will return to a very solid 10 percent,” Barrack said, adding that this would “create select opportunities for opportunistic players.”

The rise in demand is “not around the corner”, he said. “It could be three to seven years out.”

Barrack said the private equity real estate industry had been “spoiled by incredible outsized returns fuelled by high octane growth”, but “no-one had anticipated the power of zero interest rates and how you can hold [onto real estate] for a long, long time.”

The wave of deleveraging that was expected to hit commercial real estate globally didn’t happen as it did in the residential sector, he added, meaning too many people were “eeking along”.