Lee Neibart, Investment Apollo

Location: One of the biggest things bandied about right now is that there’s capital on the sidelines, waiting to invest. Is that true?

Mr. Neibart: There certainly is capital on the sidelines. We have capital on the sidelines. The interesting question is how much capital really is there on the sidelines because everything’s measured against the liquidity of these investors. Some have lots of liquidity when the stock market’s 14,000; some have less liquidity when the stock market’s 7,000. So there’s no real measure of the amount of liquidity on the sidelines. But there certainly is a lot; my guess is, it’s not as much as people think it is.

Why do they think it’s out there, then?

Because you hear big numbers raised. You hear that this fund raised that amount of money and this fund raised that amount of money. But if you really do the hard work, and add up the total amount of the actual commitment sizes, it’s probably not the range that people think it is.

When does the capital dive in? A lot of people say 2009’s a write-off.

The difference in this market from the previous down market is people are starting to question tenants. Before, it was an issue of mortgages coming due; in the early 1990s, they were rolled over and extended, but they were backed by very good and solid tenants. And the problems that are occurring now with tenants such as AIG and Citibank, and the health and welfare of these tenants, against the continued bankruptcy of some retailers, are some of the major reasons why the capital is on the sidelines. People just have to see stability in tenants’ ability to make their rent payments.

That might be a long while.

That may be a long while, but there are lots of examples of people who dove in in 2008, when the prices were 20 percent lower than they were in 2006; and they, in fact, made a mistake by doing so because those prices have fallen further.

What kinds of investors are on the sidelines?

It runs the [gamut] from pension funds and sovereign wealth funds to private-equity funds and private investors. No one wants to dive in unless they can start to understand what backs the cash flow or the rents that they’re receiving in these buildings. And those diagnostics are going and analyzing and understanding [tenants’] ability to pay rents. That’s what’s going on now.

Your firm was involved in the development of this building, Time Warner Center.

We were the co-developer with Related.

Could a building of this size and grandeur and location happen today?

No. Projects like this are definitely on the shelf, I would guess, at least for another five years and maybe even longer.

What sorts of conditions would need to arise to allow them to happen?

Mixed-use projects like this, you’d have to be able to sell condominiums that exceeded the cost of building them. We were lucky enough to have Time Warner as our anchor; so you’d have to find a major user like that who, in fact, needed 900,000 or a million square feet of space. And, in fact, the quality of the retail tenants has to duplicate itself, and be available to expand into other mixed-use projects like this.

What about commercial development in general?

Very, very few commercial developments are happening. You see the postponement of major projects in midtown Manhattan, and I would expect those to continue to be postponed. No one will be able to get what they call a ‘spec loan’ or a ‘spec construction loan’ without some type of pre-leasing. Even today, having a building 50 percent pre-leased to a major tenant may not be able to get you the financing to build the building.

What about the CMBS markets? What opens them up?

I think what opens them up is basically that the buyers of these securities feel comfortable that they are investing in monies that have the proper loan-to-value ratio. No one’s going to jump in if there’s this continued uncertainty.

Should the ratings agencies be trusted when it comes to these securities?

I think that, as part of the total re-analyzing of the entire CMBS process, all aspects of this will be reexamined.

How long will that take? I guess I’m asking about a sort of return to normalcy.

I think the return to normalcy and the absence of exotic and different types of securities, I think we’ve quickly reached that point. Investors, lenders will go back to the way they used to do business in terms of lower leverage and more coverage on the loans, and it’ll be just a return to safety across the board.

You’ve been around for a while. How would you compare the boom market to previous eras?

This was, by far, the craziest three- to four-year period that I’ve ever seen. I started in 1974—we never saw cap rates reach these low levels of rates of return; we never saw situations where the rates of return were less than the interest costs on the mortgage. So, sometimes you have to be careful what you wish for because what we created was something that was unrealistic, not sustainable, and, in fact, has caused great pain.

What’s AREA working on right now?

AREA is working on about four different types of funds. We’ve raised a new opportunity fund which will be investing in distressed assets, distressed loans; so we’re actively working on that in the U.S. We also have a value-added fund that works on properties that are half-leased and in need of repositioning. We have an urban fund which works on rental apartments in major cities, improving them for renters. And we also have a major European fund that is involved with opportunistic and with value-added investing.

And what’s your general opinion of the federal stimulus and its effects on commercial investment?

I haven’t seen any real evidence of there being any loosening up of credit for lending institutions to lend money for commercial real estate. We’ve not seen it.

Wasn’t that supposed to have happened as part of it?

You would hope so.

Do you expect it to happen?

I would expect that it may happen, and it’s going to happen much slower than we think; because even the size of the stimulus, given the amount of mortgages out there, can only do so much.

You went to the University of Wisconsin, correct?

I did.

So did my dentist. And he was saying to me the other week that what’s going to happen is stuff is going to cost what it’s supposed to cost. Do you think, during the boom, certain commercial assets were just simply inflated? If so, what caused that? And will the assets’ prices come down more to in line with the market?

The assets will certainly come back to a much lower level, and I think a lot of that will strictly be a reflection of what tenants can pay. So, law firms, accounting firms, public-relations firms, major corporations, banks will only be able to afford a certain amount of rent. That will then dictate the value of the building. If, in fact, the rents get too high, they’ll move out.

Last question: What is the most desirable commercial real estate investment right now?

At the risk of my competitors hearing this—they know it already—we feel the multifamily is the best business now to be in; because the values have come down and they’re still very well leased. So, on a risk-adjusted basis, we think multifamily represents the best bet today.

Lee Neibart,  Investment Apollo