Ivy Realty

No More Easy Money
Sunday, March 2, 2008
BY JAMES QUIRK Staff Writer

For the region's commercial real estate markets, 2008 is shaping up as the year when easy money went away.

The days of the highly leveraged commercial loan, when buyers could finance multimillion-dollar deals with little cash on hand, are over. Many lenders who once financed such loans, including commercial banks, have turned off the spigots.

"The credit markets have gone illiquid faster than anyone could have imagined nine months ago," said Emanuel Stern, president of the Secaucus-based commercial real estate company Hartz Mountain. "Underwriting standards have snapped back - if they were too loose before, now they're too tight. If before you could get money with two phone calls, now it takes 30, and you still might not get it."

However, opportunities have developed for smaller private firms that are well capitalized and focused on acquiring well-located properties. Companies such as The Hampshire Cos., Ivy Equities and Savanna Investment Management, all powered by multimillion-dollar investment funds, are aggressively purchasing assets in North Jersey and elsewhere.

Morristown-based Hampshire has perhaps the greatest momentum of the three, having acquired more than 1.2 million square feet of assets in North Jersey in the last six months. With its Fund VII program, Hampshire collected $350 million from 20 investors - mostly endowments, foundations and public/private pension funds - from November 2006 to mid-July 2007. The company intends to acquire roughly $1 billion in real estate using this fund.

Hampshire has bought industrial buildings in Clifton, Teterboro, Edison and Hackettstown; a research facility in West Orange; and a retail center in Lyndhurst. The company declined to disclose the purchase prices for any of these properties.

"The banks and the insurance companies are looking for better deals, in terms of credit quality, location, the reliability of the buyer and their experiences in the commercial marketplace," said Norman Feinstein, executive managing director of Hampshire. "That gives us the opportunity to buy because of our ability not to leverage like a typical buyer. Credit is not a primary concern to us."

More equity needed

Because of the capital raised by its investment funds, Hampshire has the ability to purchase properties with far more equity than has been the norm in the commercial markets.

For example, before the credit crisis took hold, a buyer looking to acquire a $10 million property could do so with a small amount of cash up front, relying on credit and a variety of loans to make up the difference, Stern said. A buyer could acquire a $10 million property with as little as $50,000 in equity before the crisis, he said.

"Now if you want to play this game, you need 30 percent equity in the deal," he said. "That's a big difference."

In December, Montvale-based Ivy Equities spent more than $90 million to acquire 1 million square feet from Alexander Summer LLC, a Paramus-based company. Ivy Equities has completed $1.2 billion in acquisitions since its inception 11 years ago, and controls 3 million square feet of office space and 1 million square feet of industrial.

Savanna Investment Management, a Manhattan-based company, is a recent example of how well-funded private firms are snapping up opportunities created by the subprime meltdown.

Founded in 1992, Savanna operated as a joint venture until 2007, when it raised an equity fund. Like Hampshire, this came from a mix of sources, including public and private pension funds. By December, Savanna had raised $313 million, and started buying almost immediately. The company plans to spend roughly $1 billion on acquisitions in the Northeast.

Since December, Savanna has acquired an array of assets, both property and B-note or subordinate debt purchases.

On most commercial real estate loans originated today, lenders divide the full loan into several different pieces. Subordinate notes of the loans represent riskier positions. Investors in these notes demand higher interest rates, and some positions allow for control of the asset in the event of a borrower default.

Savanna has purchased more than $100 million in subordinate notes recently on properties, which the company would be prepared to step in and own at a lowered-cost basis if the borrower defaulted, said Cooper Kramer, project manager at Savanna. These notes were purchased from several large national banks that, rocked by the subprime debacle and resulting credit crunch, were looking to offload real estate debt at a discount in return for an infusion of capital, Kramer said.

Because Savanna has the ability, unlike highly leveraged companies, to take over and manage an asset if a debt sponsor fails, "We were able to cherrypick some of the cream of the crop of what these banks were getting rid of," Kramer said.

Fort Lee-based Palisades Financial, an investment banking and advisory firm, also views the credit crunch as an opportunity to grow.

Advising companies on how to restructure loans in the current market is "actually not that difficult a sell," Procida said. He noted that some companies that were busy building $250 million offices a year ago "may only have eight years' experience, and have never experienced a downturn."

In a recent report, Goldman Sachs analyst James Fotheringham forecast that commercial property values in the U.S. could drop as much as 26 percent by 2009, with resulting loan losses reaching $180 billion.

Survival of the fittest

"My prediction is that you'll have the cream of the crop on Wall Street still playing with real estate, and the rest will go back to doing what they do," Procida said. "Prior to '97, national banks were not even in real estate, and you didn't have these REITs [real estate investment trusts] all over the place. The better ones will survive. There are plenty of regional ones who are smart folks, like Mack-Cali. They know their markets, they know their people."

Edison-based Mack-Cali Realty Corp., the third-largest real estate investment trust in the U.S., saw problems in the market leading up to the subprime meltdown that broke open in the summer, said Mitchell Hersh, chief executive officer.

A year ago, when the REIT's stock was at its highest, the company raised $252 million by issuing 4.5 million shares of additional stock. This allowed Mack-Cali to realign its debt-to-equity ratio and bring its leverage level down.

At the time of the equity drive, a sense of optimism prevailed within the regional commercial real estate markets. However, "it just seemed like pricing levels were pushed to such lofty heights," Hersh said. "You had to question how sustainable that was. As the credit market began to develop these fissures … it became clear that there were a lot of deeper issues as to how credit was securitized, and how underwriting was done."

Before the credit crisis worsened, Mack-Cali was pursuing a strategy of expanding its holdings in Manhattan. This has changed.

"Right now, there's a lack of clarity in Manhattan," Hersh said. "There is the specter of further job losses in financial services, and what is that going to do to some lease spaces? ... I'm not looking to move out of any markets that we operate in, but I'm not necessarily looking to add any inventory at this point until I get a better sense of where the market is going."

Besides managing two regional investment funds, Palisades is a provider of asset management services. Once the subprime crisis spread within the real estate markets, Billy Procida, principal and chief executive officer of the company, said Palisades Financial was being tapped by firms trying to get out of financial distress.

Procida, a 20-year veteran of the industry, said he has flown around the country in the last six months to work with firms in trouble. These include a hedge fund with $1 billion in commercial and residential real estate from Southern California to Maryland; a New York investment bank with a $25 million construction loan in default; and a Wall Street company that restructured a $93 million acquisition and construction loan on a mixed-use historic rehabilitation project in Manhattan.

Mortgage adviser

Palisades also is acting as adviser "to one of the largest mortgage servicers in the country to better implement process, procedures and recovery on single-family defaulted loans and real estate owned throughout the United States," according to a company statement. These loans represent an estimated value of $17 billion. Procida declined to identify any of Palisades' clients, explaining that most of them want discretion as they work with Palisades.

< back to news menu >

No More Easy Money
Sunday, March 2, 2008
BY JAMES QUIRK Staff Writer

For the region's commercial real estate markets, 2008 is shaping up as the year when easy money went away.

The days of the highly leveraged commercial loan, when buyers could finance multimillion-dollar deals with little cash on hand, are over. Many lenders who once financed such loans, including commercial banks, have turned off the spigots.

"The credit markets have gone illiquid faster than anyone could have imagined nine months ago," said Emanuel Stern, president of the Secaucus-based commercial real estate company Hartz Mountain. "Underwriting standards have snapped back - if they were too loose before, now they're too tight. If before you could get money with two phone calls, now it takes 30, and you still might not get it."

However, opportunities have developed for smaller private firms that are well capitalized and focused on acquiring well-located properties. Companies such as The Hampshire Cos., Ivy Equities and Savanna Investment Management, all powered by multimillion-dollar investment funds, are aggressively purchasing assets in North Jersey and elsewhere.

Morristown-based Hampshire has perhaps the greatest momentum of the three, having acquired more than 1.2 million square feet of assets in North Jersey in the last six months. With its Fund VII program, Hampshire collected $350 million from 20 investors - mostly endowments, foundations and public/private pension funds - from November 2006 to mid-July 2007. The company intends to acquire roughly $1 billion in real estate using this fund.

Hampshire has bought industrial buildings in Clifton, Teterboro, Edison and Hackettstown; a research facility in West Orange; and a retail center in Lyndhurst. The company declined to disclose the purchase prices for any of these properties.

"The banks and the insurance companies are looking for better deals, in terms of credit quality, location, the reliability of the buyer and their experiences in the commercial marketplace," said Norman Feinstein, executive managing director of Hampshire. "That gives us the opportunity to buy because of our ability not to leverage like a typical buyer. Credit is not a primary concern to us."

More equity needed

Because of the capital raised by its investment funds, Hampshire has the ability to purchase properties with far more equity than has been the norm in the commercial markets.

For example, before the credit crisis took hold, a buyer looking to acquire a $10 million property could do so with a small amount of cash up front, relying on credit and a variety of loans to make up the difference, Stern said. A buyer could acquire a $10 million property with as little as $50,000 in equity before the crisis, he said.

"Now if you want to play this game, you need 30 percent equity in the deal," he said. "That's a big difference."

In December, Montvale-based Ivy Equities spent more than $90 million to acquire 1 million square feet from Alexander Summer LLC, a Paramus-based company. Ivy Equities has completed $1.2 billion in acquisitions since its inception 11 years ago, and controls 3 million square feet of office space and 1 million square feet of industrial.

Savanna Investment Management, a Manhattan-based company, is a recent example of how well-funded private firms are snapping up opportunities created by the subprime meltdown.

Founded in 1992, Savanna operated as a joint venture until 2007, when it raised an equity fund. Like Hampshire, this came from a mix of sources, including public and private pension funds. By December, Savanna had raised $313 million, and started buying almost immediately. The company plans to spend roughly $1 billion on acquisitions in the Northeast.

Since December, Savanna has acquired an array of assets, both property and B-note or subordinate debt purchases.

On most commercial real estate loans originated today, lenders divide the full loan into several different pieces. Subordinate notes of the loans represent riskier positions. Investors in these notes demand higher interest rates, and some positions allow for control of the asset in the event of a borrower default.

Savanna has purchased more than $100 million in subordinate notes recently on properties, which the company would be prepared to step in and own at a lowered-cost basis if the borrower defaulted, said Cooper Kramer, project manager at Savanna. These notes were purchased from several large national banks that, rocked by the subprime debacle and resulting credit crunch, were looking to offload real estate debt at a discount in return for an infusion of capital, Kramer said.

Because Savanna has the ability, unlike highly leveraged companies, to take over and manage an asset if a debt sponsor fails, "We were able to cherrypick some of the cream of the crop of what these banks were getting rid of," Kramer said.

Fort Lee-based Palisades Financial, an investment banking and advisory firm, also views the credit crunch as an opportunity to grow.

Advising companies on how to restructure loans in the current market is "actually not that difficult a sell," Procida said. He noted that some companies that were busy building $250 million offices a year ago "may only have eight years' experience, and have never experienced a downturn."

In a recent report, Goldman Sachs analyst James Fotheringham forecast that commercial property values in the U.S. could drop as much as 26 percent by 2009, with resulting loan losses reaching $180 billion.

Survival of the fittest

"My prediction is that you'll have the cream of the crop on Wall Street still playing with real estate, and the rest will go back to doing what they do," Procida said. "Prior to '97, national banks were not even in real estate, and you didn't have these REITs [real estate investment trusts] all over the place. The better ones will survive. There are plenty of regional ones who are smart folks, like Mack-Cali. They know their markets, they know their people."

Edison-based Mack-Cali Realty Corp., the third-largest real estate investment trust in the U.S., saw problems in the market leading up to the subprime meltdown that broke open in the summer, said Mitchell Hersh, chief executive officer.

A year ago, when the REIT's stock was at its highest, the company raised $252 million by issuing 4.5 million shares of additional stock. This allowed Mack-Cali to realign its debt-to-equity ratio and bring its leverage level down.

At the time of the equity drive, a sense of optimism prevailed within the regional commercial real estate markets. However, "it just seemed like pricing levels were pushed to such lofty heights," Hersh said. "You had to question how sustainable that was. As the credit market began to develop these fissures … it became clear that there were a lot of deeper issues as to how credit was securitized, and how underwriting was done."

Before the credit crisis worsened, Mack-Cali was pursuing a strategy of expanding its holdings in Manhattan. This has changed.

"Right now, there's a lack of clarity in Manhattan," Hersh said. "There is the specter of further job losses in financial services, and what is that going to do to some lease spaces? ... I'm not looking to move out of any markets that we operate in, but I'm not necessarily looking to add any inventory at this point until I get a better sense of where the market is going."

Besides managing two regional investment funds, Palisades is a provider of asset management services. Once the subprime crisis spread within the real estate markets, Billy Procida, principal and chief executive officer of the company, said Palisades Financial was being tapped by firms trying to get out of financial distress.

Procida, a 20-year veteran of the industry, said he has flown around the country in the last six months to work with firms in trouble. These include a hedge fund with $1 billion in commercial and residential real estate from Southern California to Maryland; a New York investment bank with a $25 million construction loan in default; and a Wall Street company that restructured a $93 million acquisition and construction loan on a mixed-use historic rehabilitation project in Manhattan.

Mortgage adviser

Palisades also is acting as adviser "to one of the largest mortgage servicers in the country to better implement process, procedures and recovery on single-family defaulted loans and real estate owned throughout the United States," according to a company statement. These loans represent an estimated value of $17 billion. Procida declined to identify any of Palisades' clients, explaining that most of them want discretion as they work with Palisades.