Tunnelling for daylight

There is a newfound sense of optimism among private equity real estate pros, even given the major challenges facing the industry.

Is the real estate industry seeing a light at the end of the tunnel?

When private equity real estate professionals last gathered for the Pension Real Estate Association (PREA) conference in October 2008, the world was still numb following the collapse of Lehman Brothers and the bailouts (both public and private) of Merrill Lynch, AIG, Fannie Mae and Freddie Mac. There was a new understanding to the phrase “shock and awe”.

As members returned for the association’s spring conference in Washington, DC this week there was a palpable change in the mood of the room. In short, confidence was spreading.

No one was underestimating the challenges the industry faces. Private conversations on the sidelines of the conference were regularly littered with talk of zombie firms and funds, and deals that had been written down by 50 percent or more. For those fund managers currently in market with property vehicles, the talk was dominated by the newfound cautiousness of LPs.

Indeed, as the speakers on stage repeatedly highlighted, the challenges facing the industry are immense. With more than $814 billion of commercial and multifamily mortgages set to mature between 2009 and 2011 – and the credit markets unlikely to recover in any significant manner by that time – attention is firmly focused on debt roll-overs.

A poll of delegates revealed that for half of all those attending, the availability of debt upon loan maturity was the biggest risk factor facing private equity real estate firms in 2009.

Yet, even given this clear understanding of the state of the industry (and wider global economy), there was an increasing sense of optimism.

Fund managers are at last beginning to see some of the distressed opportunities that they talked about so eagerly last October, and which are only expected to get better as the year progresses.

Add to this the resurgence of the world’s stock markets and the US government’s latest plan to rid banks of their toxic real estate-related assets as part of its Public-Private Investment Program, and the idea that the tunnel might not just be heading downhill is starting to emerge.

As Bob Larson, chairman of Lazard Real Estate Partners, said on the second day of PREA: “Hidden in the challenges for commercial real estate over the next six to 12 months is the incredible opportunity coming out of that environment. All of us are going to be challenged to find where those opportunities are but I see more upside than downside.”