THE US DEBT MARKETS and the ALL CASH BUYER

By Matt Zarlengo
Acquisitions
Commercial real estate lending came to a grinding halt in the third quarter of 2007 and even with the tens of billions of dollars that have been been thrown at the problem by our elected officials in Washington, the commercial real estate debt markets have yet to unthaw or show any signs of doing so. Year to date, there has yet to be a single issuance of new CMBS paper in the US and a paltry $10 billion was issued in all of 2008 (as compared to $270 billion in 2007). Big banks continue to hold toxic mortgages on their balance sheets while the so called US banking regulators simply turn a blind eye to the very likely possibility that some of these massive banks are simply insolvent. Until the federal government begins to force banks to take the write offs that we all know are there and mark the loans to market, the commercial real estate recovery will be anemic at best.

You might be asking yourself the following question “why does a company that plays in the all cash arena care about what is happening in the debt markets?” As an acquisitions officer with Baceline I am tasked with finding suitable investment opportunities that meet our investor return thresholds. This has been extremely difficult due to the complete lack of transaction volume over the past 18 months due primarily to the frozen debt markets. Most real estate investors don’t operate on a cash only basis and require debt to make acquisitions. With the debt markets frozen, this makes it impossible for the majority of investors to do any deals. This has resulted in a lack of pricing guidance which has further hindered transaction volume. There remains a significant, albeit slowing shrinking, bid/ask spread between what investors are willing to pay for assets (stabilized, distressed or in between) and what sellers (investors, banks, CMBS special servicers) are willing to sell those assets for. With no transactions to gauge pricing off of, values are anyone’s guess.

We at Baceline remain steadfast in our efforts to establish meaningful relationships with the decision makers who will ultimately be in charge of liquidating troubled assets. Those relationships are being forged with local, regional and national banks as wells as CMBS special servicers. By establishing these relationships we are confident that our work efforts will prove fruitful and put us in great position to act once the current logjam is removed and transactions are once again closing.