In a market like this one, what's a developer to do? Fortunately for Michael Newman, president and CEO of Golub & Co., the 50-year-old international real estate development investment firm is also active in portfolio management, asset disposition and workouts. MortgageOrb asked Newman about the dominant trends in these and other business lines, as well as what the U.S. might learn from other commercial real estate markets.
Q: Looking at your development business line specifically, how have you needed to change your overall strategies in recent months to secure financing for projects? What have been the biggest challenges?
Michael Newman: The recent fluctuations in the markets have encouraged us, like many other companies, to reexamine each project's unique circumstances and make strategic adjustments as necessary.
Our developments under construction were financed to anticipate shifts in market dynamics, but for projects still in the predevelopment phase, we are mostly choosing to wait out the market for a time when the cost of capital goes down from today's levels and overall market conditions improve.
For instance, we own land in the southwestern U.S. that could have begun development in the next 12-24 months. However, we will likely slow up our predevelopment activity until the market begins to return, and then finance and build at that time.
Conversely, we've seen an influx of interest for our workouts business line, and we have access to capital through many of our partners to finance new projects that make sense. Our experience in turnarounds has become a larger dialogue with many debt holders, loan servicers and others addressing the disposition of distressed real estate projects and loans.
Q: Are portfolio lenders the funding source of choice right now? Where else can capital be found?
Newman: Capital provider relationships are always important – regardless of the market. Any funding source is experiencing challenges right now, and the cost of capital is quite high, with availability being low.
Unless you are in a unique situation where access to capital is a must in the short term, it is best to try not to create a need for it in the current market situation. That being said, for unique opportunities – such as those being seen by our workouts group – portfolio lenders are a natural source to turn to for capital.
However, we are all seeing capital also become available in more nontraditional sources, such as hedge funds and pension funds – and now – the federal government. There are risks and benefits to any source of capital right now, so it is best to asses each situation carefully for the best financing strategy.
Q: What can you say about the overall European commercial real estate market right now? Is the buzz true that a U.S.-style downturn might be hitting in parts of the continent?
Newman: We have definitely seen a slowdown in Central and Eastern Europe (CEE) for most property types – though not as dramatic a shift as in the U.S. However, what is different and rather encouraging about that market is that there is more true demand for commercial space.
In the U.S., there is a general oversupply, but in CEE, the demand remains, thanks to positive demographic growth in that region.
We've been active in the CEE for the past 20 years. Due to our length of time developing in that region, we have fostered partnerships with many lenders that serve those markets. These relationships have helped us in our U.S. operations and have linked us with sources that would potentially not be available for developers that work only in the U.S.
One of our key lessons has been that casting a wider net where you can in other market economies can bring value where you may not expect – even very close to home.
Q: Given all their negative attention lately, do you still consider condo conversions – listed as one of your target areas – a good idea?
Newman: We are not pursuing condo conversions actively at this time, mostly due to a surge of product that has come online in the market over the past five years.
Where we have seen opportunity, on the other hand, is in the growth in demand for luxury rental apartments that have the same features, benefits and amenities that you would find in a condominium building.
We have focused efforts in the past decade to conceptualize, design, develop and manage luxury high-rise residential buildings, and we have found this to be a successful business line. Our next luxury apartment development, Streeter Place, opens in Chicago in 2009.
Q: On the asset disposition side, what trends have you noticed in clients' portfolio management? Are declining commercial real estate values influencing actions taken?
Newman: Because we typically play a principal's role in our projects, we own a piece of nearly every project in which we're involved. So in a sense, we are the client.
Right now, no matter what side of the negotiating table you're on, there is a need to be patient, opportunistic and innovative. We have seen disposition transactions greatly reduced as the wait-and-see attitudes from both buyers and sellers proliferate.
For stable asset situations, this is an appropriate strategy to employ while experiencing a volatile market.
However, we are seeing disposition activity increase for situations where there is not as experienced of a development team or the asset is not as well capitalized. This can be on an elective basis or, sometimes, a forced basis.
We have also been creative within our mixed-use asset portfolio. Some of our properties that have bundled entities such as office space, parking, retail or a major not-for-profit tenant have seen interest from clients to separate these entities for a specific disposition strategy. The whole, apparently, is sometimes not greater than the sum of its parts.
For example, we've worked with specific tenants to purchase office space from within a building to meet tax needs – condo their space. We have also unbundled specific pieces of an asset to allow companies to acquire an entity that fits into their specific and relevant expertise.
This has proven attractive to the buyer, as it creates lower risk and lower capital required, and allows a business to make an investment in an area that is their core strength. It's attractive from an ownership perspective, because there are opportunities to have a transaction occur that, a generation ago, may not have existed in the market.