“We will continue to see a more orderly let down in asset values as holders of CRE, both of notes and equity, capitulate to market realties and, as a result, an increase in deal flow,” predicted L.A.-based Michael Singh, managing director of Jones Lang LaSalle Inc.
How has 2010 been for you? What have you been working on lately?
Singh: By most accounts 2010 has seen a relatively steady improvement in many areas of commercial real estate. Carrying over from 2009 we are seeing greater acceptance by banks to move troubled loans off their books. Our note auction business with our partner REDC has enjoyed growing market share, and note buyers have become more aggressive in their underwriting of opportunities narrowing the gap between seller and buyer pricing expectations.
Do you think there will be continued growth in the “note buying segment”?
Singh: I am confident we will continue to see growth in this segment as banks build capital reserves to take the necessary write-downs to sell assets.
So, it seems business has picked up. What else have you been working on lately?
Singh: We are also experiencing a marked increase in loan brokerage assignments. My group recently closed a large acquisition loan for a downtown Los Angeles office building, and has several more large transactions in the pipeline. Compared even to earlier this year, loan terms have improved significantly, and lenders are not hesitant to compete aggressively for the best assets in the right locations.
Since you mentioned note sales. Care to talk a bit about the differences—pros. and cons—about sealed bid vs. auction note sales?
Singh: Depending on whom you ask, there are roughly five, maybe 10 significant note seller platforms nationally. When we entered the market in 2009, a significant part of the business was still driven by the FDIC through large bulk sales. However, individual and smaller investors could not compete, and banks with smaller portfolios did not have an efficient and cost effective option to dispose of notes. While JLL has been an active institutional note sales broker for years, we soon realized that a fresh approach was required to address the current needs of banks and the broader market of investors. So together with our partner REDC we developed an on-line commercial note auction. Banks and special servicers quickly recognized the benefits of monetizing trouble loans using our platform rather than expending resources on foreclosing and managing REO.
I assume there are others out there with that type of platform? How do you differentiate yourself?
Singh: What differentiates us from our competitors is that we do not charge sellers upfront fees and auction each loan individually providing scalability and best execution possible for each note. Bidders compete only for those notes they are interested in, typically driving pricing to market clearing levels. In a sealed-bid or pool sale, buyers are not afforded the pricing transparency of an auction and generally must accept some unwanted assets in order to acquire those they do want. Although we like our auction approach and believe it delivers sellers the best results, there are situations where sealed-bid or pooled sales may better address sellers’ particular objectives.
Now for the crystal ball question. Any market predictions going forward towards the end of the year?
Singh: Predictions are always a challenge. Barely two years ago, most people were predicting a flood of distressed assets hitting the market, but that has not played out. Provided we do not have any unanticipated shocks to the economy, I think we will continue to see a more orderly let down in asset values as holders of CRE, both of notes and equity, capitulate to market realties and, as a result, an increase in deal flow. The peak in loan maturities is still ahead of us and absent a miraculous recovery in real estate fundamentals and a surge in debt capital, the note sales business should continue to keep us very busy. (credit n. dolce globe st.)