When real estate executives talk about the potential deluge of apartment properties that could end up falling into financial distress, they often refer to the days of the Resolution Trust Corp. (RTC). But is that an accurate comparison?
After all, there is a parallel. In the '80s, the peak of the multifamily market was 1986 and 1987. In this cycle, the peak was 2006 and 2007, before things started to fall off. The nadir in the last cycle was 1990 and '91. Eventually, the federal government took over those assets by closing on savings and loans, putting the assets in the RTC, and then distributing them in the early '90s.
So will we see an RTC-like instrument take over assets and distribute them around 2011 and 2012? Some think so.
“In the last go round, you had a transfer of assets to the public markets, which you’re starting to see now,” says John Bartling, managing partner at Dallas-based AllBridge Investments. “Then we went into a quiet period. I believe we're into that now, and we will be into it for two or three years while people are restructuring, where bankruptcy laws will be tested and where banks will be foreclosed and consolidated with the FDIC. The transfer of ownership to debt vehicles will ultimately lead to liquidation. We’re probably three years away from liquidation phase.”
If it plays out like this, the distressed assets in the market could be going back into private hands by 2012 and 2013. But there are differences this time. For one thing, many of the problem loans this time are CMBS structures that can be owned by many investors based all around the world.
“This will be much, much more complex than it was in the '80s,” says David Gleeson, CRE, executive vice president for L&B Realty Advisors, a pension fund advisory firm in Dallas. “It will be more challenging and go on for a longer time. So many loans have been securitized and sold off. That’s the big challenge.”
The government’s role could also be different this time. “The government’s role in the RTC days was to shut down the S&Ls,” says Arnold (Arnie) Tesh, CRE, senior vice president at FTI Consulting, a Washington, D.C.-based consulting firm. “Today, we’re basically designed to bail out the banking system. They’re separating the toxic assets, getting them off the books of the banks to create solvency.”
That will slow things down. “The banking institutions don’t have to move these out quickly,” says Frank Apeseche, CEO of Berkshire Property Advisors, a multifamily owner based in Boston. “They don’t have the fire sales. We are not going to see an RTC.”
Because of this, Apeseche expects prices to stabilize more than in the first downturn since there won’t be a flood of assets on the market. “It’s really going to take longer,” he says. “If you look at maturities coming due, there’s a wave. I think this stuff moves out between 2010, 2011, and 2012.”