Edward Padilla, CEO, NorthMarq Capital
Any major downturn in an industry or in the economy has a variety of
stages. Depending on the industry, the cycle may be longer or shorter
compared to historical experience. Unfortunately, the process of downturn
and recovery followed by prosperity and excess seems to repeat itself. Our
reaction to the process seems consistent as well: From denial and
frustration to acceptance and recovery seems to be our nature.
In the world of capital markets and commercial real estate we are largely
past the difficult stages of this down-cycle. The opportunity phase from the
last downturn ran from about 1993 until about 1998. Prosperity lasted
through a longer than average period (1998 – 2007) as capital flooded the
market. Acceptance has taken place in the year since the financial sector
meltdown, including the government takeovers of Freddie Mac and Fannie Mae.
Re-valuation is occurring as we speak, and it may be continuing for some
time. Virtually all commercial real estate values have fallen… in some cases
as much as 50%. This correction is a slow, painful process. At times in the
last year it seemed as if availability of capital was completely eliminated
in many instances. Hardly any properties were immune from devaluation or
capital access issues.
Reality is that we have spent two years in the process of denial to
re-valuation. The good news is that part of the cycle is behind us. Most
commercial real estate professionals view our industry as cyclical, which
means it will recover. At the extreme ends of all cycles you will find those
that believe the “ride” will be continuous, but the truth is they are always
wrong. When the re-valuation process nears its end, trades will begin.
For commercial real estate mortgage investors, the loans being made today
are the “best” loans (from a lender’s perspective) that they have seen or
will see in years. The few purchase transactions that executed over the last
few months and those that are completed in the next year will be the “best”
acquisitions (from a buyer’s perspective) we have seen in years.
Once we have reconciled this point in the cycle, and values become
established, transactions will begin to occur. Opportunities will present
themselves. There will be opportunities to buy, to finance and to establish
a new standard of service to the industry. New relationships will be formed,
and there will even be the modest beginning of new construction activity,
planning forward to delivering product into a new cycle.
The challenge now is to sustain the capabilities and be the one that is
standing ready to provide the service, execute the acquisition, or deliver
the capital. Opportunities will lead to transactions and set the new
benchmarks for availability of capital and value.
As I briefly glance in the rearview mirror at the past two years, the
best I can say is that I’m glad it’s behind us. I look forward to our mutual
success as one of those that have anticipated these opportunities and placed
ourselves in position to enjoy the ride back up.