MacManus: Current Cycle Unlike Any Other

MBA (8/25/2008 ) Murray, Michael
Thomas MacManus, CEO and chairman of Cushman & Wakefield Sonnenblick Goldman, New York, discusses the current real estate cycle and his outlook in the second of a two-part interview with MBA NewsLink.

MBA NEWSLINK: This is a intense cycle, and analysts are now saying the residential market will not return until 2010 or possibly 2011 or 2012 after hitting bottom in 2009. What are your thoughts for this on commercial real estate?
THOMAS MACMANUS: It is really a function of what happens in the rest of the economy. I think it’s too early to tell. What will really have the most impact on the commercial sector will be the overall economy—whether it’s job creation or job losses.

We want confidence to come back to the extent that we just have a normal flow of capital. Never mind the fundamental side. I would expect the mid-to-latter part of next year we will start to see a notable improvement in the flow of capital. That could mean that there has been an adjustment of risk-adjusted pricing, that buyers and sellers, lenders and investors have recognized where they want to be on the price point and now they are doing business at a different price point so there’s flow, but it’s done based on different fundamentals—an assessment of risk, vacancy and other data.

The best thing that can happen to us is in the confidence level where capital flow is decisive—even if the decision is in paying less based on cost of capital or not paying as much because of vacancy [movement]. At least that’s data which results in decisions. Right now, there is a lack of confidence and a lack of data points because of the insufficient transactions necessary to reflect the lines on these data points.

NEWSLINK: During the savings and loans crisis, the commercial real estate market’s fundamentals eventually led to poor fundamentals in residential real estate. Do you see it as reversed this time around—that residential is going to cause poor property fundamentals in commercial real estate?

MACMANUS: Real estate is local in many respects. As the economy goes, you will see appropriate adjustments in the commercial sector. That will be the lagging indicator or consequence from an economic downturn if and when that proves to be a sustained fact. Right now, we don’t know that.

NEWSLINK: Based on past cycles, how do you see the CMBS market moving out of this cycle, particularly if the economy and property fundamentals weaken?

MACMANUS: It is a little different cycle. There was an unusual liquidity crunch during the Russian ruble crisis back in 1998, and that was more of a capital markets event—not a fundamental real estate problem.

In the late 1980s and early 1990s, we went through that last real estate recession. That was very much a function of loose money and loose underwriting, excessive capital and excessive supply of real estate. There was a lot of spec lending and spec development going on. We do not have that level of speculative development except—granted—there was the hype in the condo for-sale market, but it was not necessarily elsewhere in the commercial sector.

This doesn’t look exactly like anything we have seen in the past, so it is difficult to project what the outcome is going to be. If there is, in fact, a sustained downturn—and I’m not saying there will be, but if there is—the challenge to the capital structures that have been put in place are going to be very interesting because the solutions to the workouts from 20 years ago were different. Those capital structures were not as complicated as the capital structures are today.

The good news is that complications might be great in good times, and people are comfortable with that. But, if you’re trying to reconstruct the capital structure through a workout, that could prove quite challenging.

NEWSLINK: When capital flows do return, how do you see the market? Would it be back to something more in line with 2002?

MACMANUS: I would see more simplicity, transparency in structures. Again, it could be creative, but they have to be sufficiently transparent even if they are creative structures. That will be the first step that we will see. You might even see CMBS come back and look a little bit more like a true investment-grade loan on real estate with not so much reliance on the mezzanine and b-note.

It might have a very high quality, low leveraged securitized loan, and the b-note, or b-piece, is taken by someone that truly owns the risk and may not be distributed as far through the capital sources distribution network as it has been lately.