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Lehman, AIG create ‘uncertainty’ in RE market

The fall-out from the collapse of investment banking giant Lehman Brothers could have long-term implications on the real estate investing marketplace, according to private equity real estate professionals, but at the moment most investors are adopting a wait-and-see attitude.

Lehman’s filing for bankruptcy earlier this week and news last night of AIG’s $85 billion (€59 billion) bailout by the US government have sent chills through the real estate marketplace. Despite the headlines, real estate professionals are sitting tight, waiting to see how the collapse of one of the country’s largest financial institutions will play out.

There is general uncertainty among real estate investors, following the demise of Lehman and takeover of AIG. “If anyone says they understand what is happening right now they are being misleading, the general reaction is shell-shock,” one real estate investment professional told PERE. “People are reeling, literally, from what’s happened in the past 5 days. This is a calamity in the multitudes of what happened in the RTC.”

The bankruptcy news has sent ripples through the real estate world. Lehman’s problems have been contributing to “uncertainty and fear” in the marketplace, Susan Stupin, managing director at New York-based real estate merchant banking firm, The Prescott Group, said. “Lehman is both a lender and an equity investor so they’ve got a lot of partners, borrowers, and relationships in the real estate world. As a practical matter, it’s going to likely be much more complicated for those people who are partnering in some fashion with Lehman to renegotiate, restructure, and to have an ongoing dialogue on some basis. That’s going to create a level of complication which somehow has to be processed by the market.”

And how that will be processed is still ambiguous: “This is a very technical issue and by its nature difficult to understand the full impacts immediately,” said one investment professional. “Investors in particular are just trying to understand what’s happening and it’s not fully clear yet.”

Ultimately it comes down to a matter of waiting to see how the Lehman and AIG story will unfold itself. “It may be that as matters evolve and resolve at Lehman, in terms of where the real estate people will wind up and how that will stabilize, that may eliminate some of the uncertainty in the marketplace,” said Stupin.

Indeed, the Washington DC-based Real Estate Roundtable – the commercial real estate industry’s trade body – said today the US financial marketplace continued to face “unprecedented challenges,” adding that “rebuilding confidence in our financial institutions must continue to be a national priority.” The US government has taken measures to that effect, the organization said, with its bailout of AIG representing the “latest positive step” by the government to “restore investor confidence in the debt markets.”

The Federal Reserve agreed to an $85 billion bailout on Tuesday that would give the government control of the insurance company, American International Group. The decision came just two weeks after the Treasury’s takeover of US mortgage finance companies Fannie Mae and Freddie Mac.

All these developments will likely have long-term implications for real estate investors. “We’re seeing that investors are beginning to have more of a renewed interest in risk-adjusted returns,” said Stupin, adding that market conditions were prompting a “flight to quality,” with capital available for “well-conceived properties that have secure cash flows.”

Going forward, opportunities could emerge for capital-loaded investors quick to capitalize on investments that present themselves, but at the moment most are still waiting on the sidelines. “Those who really have the equity capital are trying to fine-tune their strategy, figure out where they can find the best value, and are waiting to take advantage of the opportunities that most everyone thinks are emerging or will continue to emerge,” concluded Stupin.