In the paralyzed commercial real estate market, where panicked brokers wring their hands as deals founder, a number of nimble New York pros are looking to claim their share of the emerging submarket that surrounds distressed property assets.
It’s not a new business, mind you. It’s more like an old one that reemerges when there’s a financial crisis, when landlords can’t pay creditors, when real estate firms go bankrupt, when a strong firm buys a weak one. Real estate investors in trouble need advice, after all, just like the rest of us.
“Did I think this would happen again? Yeah,” said Anthony McElroy, a managing director at Colliers ABR who’s heading its New York distressed-asset team, formed in September, and who worked with distressed assets in the ’90s, back in the days of the Resolution Trust Corporation, birthed by the savings-and-loan crisis.
Colliers ABR is hardly alone in seeing the writing on the crumbling wall and moving experienced RTC hands into new positions.
Jones Lang LaSalle has formed a distressed-asset team. So have Savills Granite, Newmark Knight Frank, Eastern Consolidated and Grubb & Ellis.
Mind you, while much of this distressed business is reminiscent of the 1990s, sorting out these assets promises to be a lot more complicated and time-consuming.
“In the ’70s and in the ’90s, you were dealing with lenders that had aligned interests,” said Newmark Knight Frank’s president, James Kuhn, who this summer began forming Newmark’s Strategic Advisory Group. “If you had a bank consortium, they were all first-mortgage lenders. Today, lenders are all in different places in the capital stack. … And you have securitization, which you didn’t have in the last two recessions. … It will be a lot more difficult to get decisions made.”
Difficult it may be, but distressed assets offer cash-starved brokerages a convenient way to ride out the downturn.
“We formed several groups to address the challenges going on in the economic environment right now,” said Kenneth Rudy, president and COO of Jones Lang LaSalle Capital Markets. “We call these services the value-recovery services.”
It’s a nice euphemism, positive yet apt. Mr. Rudy, who has a way with words, calls the staffers in his five major groups “swat teams.” These swat teams are charged with jumping into bad situations (he calls them “vortexes”) to sort out knotty problems resulting from forced mergers, distressed loans, excess office space and bankruptcy.
“Imagine Bank of America [a JLL client] taking over Merrill or Countrywide,” Mr. Rudy explained. “Their in-house staffs are just absolutely overwhelmed on the occupancy strategy.”
At Savills Granite, senior vice president R. John Wilcox said he and about 35 of his colleagues have likewise created a distressed-asset group to deal with bankruptcies and workouts.
“Savills has a number of clients overseas that have U.S. real estate exposures,” Mr. Wilcox said. “We’re getting calls every day from those people asking, ‘What do we do with the debt we bought or property we bought with a local sponsor?’ Or, ‘Here’s our exposure—tell us what we should be worrying about.’
“We are doing note sales, asset sales, recapitalizations where we bring in new money or new debt. We’re doing advisory work either for lenders or for borrowers before a foreclosure or a bankruptcy. And then, lastly, we’re working on restructuring or bankruptcy for creditors and debtors.”
Meanwhile, David Schechtman, senior director of Eastern Consolidated’s Turnaround and Distressed Group, has what can only be referred to as kick-ass timing. A bankruptcy attorney, Mr. Schechtman moved to Eastern in October 2005 with the intention of applying his bankruptcy background to commercial real estate.
“There wasn’t a ton of it in 2005,” he said. “But we were getting hired by the courts in Chapter 11. We were working with the banks on what little distressed they had. And we were building our brand before it was in fashion and with an eye toward the changing market. Now that it’s changed, we’ve been here for years, and importantly, we are expert in the 2005 changes to the federal bankruptcy code and other banking law nuances, which allows us to better advise our clients.”
Now there are five brokers, three analysts and support staff working on distressed assets, and he’s hiring.
“The wave is crashing and it’s finally here,” Mr. Schechtman said, “and I am very lucky to be in the right place at the right time.”