CHICAGO - The recovering economy and its impact on the real estate market was the main focus at Information Management Network's Insurance Company Commercial Mortgage and Real Estate Investing Summit, held last week at the Hotel Inter-Continental Chicago.
In his opening remarks, Jack Verschuur, senior vice president at Mutual of Omaha, mentioned some key concerns and questions about the current state of the real estate sector: Is there oversupply in some areas, specifically in the office markets?; can the tapped-out consumer still spend?; how quickly can job creation and office expansion take place?
The opening panel tackled the issue of how the macroeconomic picture is affecting insurance companies and their property investments.
Panelists agreed that the economy is heading towards the right direction but has a long way to go before it really moves towards serious improvement. Further, the escalation of war in the Middle East and the possibility of skyrocketing oil prices may easily derail all the recent positive economic indicators, panelists noted.
One avenue that a lot more people are chasing after this time around (compared to the previous downturn) is distressed debt. Alan Kravets, president of Sheldon Good & Co. LLC, a firm that specializes in the disposition of property through auctions (thus putting them in the frontline of troubled credits), said his firm has been getting a lot of calls from banks and finance companies indicating that there are many troubled credits out there to work out.
Participants at the session also stated that the real estate sector is currently coming off a period where mortgage delinquencies were low, so historically speaking, though there are now rough spots that have to be suffered through, the current problems are hardly catastrophic.
The different sectors
Each session at the conference touched upon how the downturn is affecting the various real estate sectors.
In the opening panel, participants said that apartments generally do better in recessionary environments because of reduced homeownership rates. The industrial sector, which closely follows GDP, traditionally recovers faster when the economy is improving.
Office, which historically lags the economy and the real estate market, is plagued with companies that have subletted more space than they really need. So the current oversupply in this sector is not caused by overbuilding; in fact, the numbers of deferred projects had skyrocketed in the office sector.
Donald Devine, vice president at Metlife Real Estate Investments, said that people have engaged in "speculative leasing rather than speculative construction." Even if business expansion takes place with the recovering economy, Devine said, it would not be fast enough to cover for the oversupply in office space.
Hotels have obviously been affected by the events of Sept. 11. However, Sheldon's Kravets said that there are opportunities out there for buyers. He added that his disposition company has five hotels currently up for sale and another five that they are signing up. Sellers still believe that they could offer prices will interest buyers.
"The key is equity," Kravets said. "It is a highly-leveraged business."
Though the retail sector has always been considered rather problematic, there are bright spots. In a separate session, James Lagasse, vice president in the commercial mortgage group of Cigna Investments, Inc. said he is still bullish on the retail front. However, his company focuses on regional malls, and is not really looking at anything lower than that.
Terrorism insurance remained a hot topic in some panel discussions. In the opening session, panelists urged conference participants to be proactive in the bid for Congress to act on the issue.
Panelists said that the role of the government is to backstop the cost of this kind of insurance. Insurance companies, they said, would not be able to stay afloat if they had to pay all the claims related to terrorism.
In the session on REITs, for example, panelists said that terrorism insurance is available to single borrowers but at a very steep price. Richard Kincaid, chief operating officer of Equity Office Properties, said that his firm was able to avail itself of this type of insurance by leveraging its entire program.
Representatives from TIAA-CREF said the firm is still lending on trophy assets. Panelists also mentioned that the limited availability of terrorism insurance is not going to stop the CMBS world from lending and that CMBS players are learning to work around the issue. There are actually some borrowers who have obtained this type of insurance up to the loan value, while others have opted for something less. A lot depends on where a particular property is located.
Another type of insurance that was discussed during the conference was environmental insurance, which is used in CMBS as an alternative risk management tool for environmental liabilities associated with the commercial real estate lending business.
Currently, only AIG Environmental offers a lender's environmental policy (protecting the lender and not the borrower) recognized by the rating agencies for CMBS. Two other companies, Zurich North America and Chubb Environmental Solutions, are currently finalizing the process with rating agencies to adapt their respective policies to use in CMBS transactions.
Two years ago, rating agencies came out with guidelines for the use of this lender insurance product in CMBS. Rating agencies have traditionally required a new Phase I Environmental Site Assessment as part of the underwriting process, but have already accepted the use of lender's environmental policy in lieu of a new Phase I.
This type of insurance policy has gained ground, attendees noted. Credit Suisse First Boston, for instance, uses environmental insurance to address B-piece buyers' specific issues and for small, seasoned loans where it does not make economic sense to conduct due diligence.
Representatives from AIG said that the use of this product in CMBS depends on how much credit rating agencies are willing to give for having this type of insurance in CMBS transactions.