Keeping it Real

The US real estate market is stabilizing across sub-sectors, investors and bankruptcy experts said Wednesday at the Turnaround Management Association conference in New York, but this will not protect businesses from foreclosures by any means.

Illiquid real estate is expected to generate a glut of long-term bankruptcies, experts said, and even as disparate improvement is seen, there remains potential for real estate designated for offices, homes, commercial usage, warehousing and hotels to hamper the economy.

The industry as a whole has been buoyed by REITs pursuing prime real estate assets and numerous federal stimuli aimed at preventing illiquid properties, notably in the retail sector.

“Fundamentals are getting worse in most markets,” said Spencer Levy, senior managing director with CB Richard Ellis Group. Levy said that there must be a marked improvement in job availability that will help foster growth and value in order to reverse this.

Specific regions, investors said, are faring better than others. Sometimes, it is on a block-by-block dynamic. Levy noted that the midtown New York real estate market has outperformed properties downtown, for example.

David Iannarone, president of CW Capital Asset Management, pointed toward regions of the US affected by automakers’ bankruptcies and Florida as particularly difficult markets.

The long-term lack of retailers is creating opportunities for new tenants in some locations. While superstores like Wal-Mart and Target can move to fill out bigger spaces, it has been suggested that schools and churches might take advantage of discounted, former retail-only, real estate in order to serve their respective members.

A Maximus Advisors report recently published suggested the nation’s commercial property markets continue to suffer and that office vacancies and retail market segments will hit 18% and 11.3% this year, respectively, for each sub-sector. Warehouse vacancies are expected to peak this year as well and rents in warehouses will continue to decline through 2011, the report stated. Also, the report indicated, apartment vacancies will soon peak and the hospitality industry is close to its cyclical bottom—if it is not there already.

Andrew Graiser, co-president of DJM Realty, told TMA audience members he expects discount stores will also look to fill out more retail real estate space.

The hotel space has been ripe for cheap bargains from over-levered projects; Anup Sathy, partner at Kirkland & Ellis LLP, cited Carl Icahn’s bargain buy of the Fontainebleau Las Vegas, which is now being “mothballed” awaiting a better market in which to be sold. Levy said he feels the hotel real estate space is beginning to see signs of stabilization, but the only properties that truly attract investors are high-end properties. This means more will be forced into foreclosure by investors like CW Capital.

“We are taking back a lot of hotels,” Iannarone said.