Panel sees slow return to US property investment

The credit crisis has dried up financing for real estate and buyers are scarce. As vacancies rise and rents soften, some overextended borrowers may be pushed into default. US commercial real estate prices are expected to decline anywhere from 20 to 30 percent from the peaks in 2007, according to various prognosticators. Sales will begin to perk up when buyers use lower leverage without restrictive debt covenants, leaving enough cushion for any further value declines. "I think the starting point will be where the assets are in good locations, where you can wait," Stuart Rothenberg, Goldman Sachs managing director and head of its Whitehall funds which invest in real estate for institutional investors. "If you think today is the bottom, and if it gets 20 percent worse or 30 percent worse, you can still stomach that," he told members of the Real Estate Board of New York on Thursday. "It's from that basis that I think people are going to start investing again." Goldman invests through its Whitehall funds that have recently raised billions of dollars to make senior mortgages and riskier mezzanine loans. The funds have raised more than $26 billion. "We're keeping our powder dry for the most part," he said. "But once again, some of the more compelling opportunities - retail for example, regional shopping centers - at the end of the day, still have tremendous barriers to entry." But a recovery will not be quick, he said. "It will be slow, and it will start in painful ways, meaning a lot of debt will be low leverage, (with) wide spreads and big fees," Rothenberg said. "But then it will slowly and surely come back." Tenants' ability to pay also will be more important than in recent years when it comes to securing investment, Lee Neibart, senior partner of Apollo Real Estate, which has invested $8 billion in more than 400 transactions valued at more than $30 billion. "It's all about credit and tenant quality," he said, noting that a borrower cannot assume that a corporate tenant with a great reputation will be able to pay its rent. As real estate investors in debt and equity cautiously return to the market, they likely will favor certain types of properties at first, said Gregory Reimers, executive vice president, North East Market manager of JPMorgan Chase & Co Real Estate Banking. "As money gets to work on the debt side and the equity side, it's going to start in the predictable places where the asset is more stable and where the cash flow is more viable," he said. "That has historically been the multifamily, the industrial, and some of those things that motor through cycle a little bit better." Within the third quarter alone, 187 funds that invest in high-yield, riskier real estate investments worldwide raised $155 billion, according to research from real estate fund of funds manager Clerestory Capital Partners.