Falling transaction volume, compounded by financial turmoil on Wall Street, is reducing demand for many services provided by investment banking firms, but the turbulence also is creating new opportunities. John Lyons, CEO of Savills LLC, has launched a distressed real estate group to assist clients. It's familiar territory for Savills professionals who assisted with loan workouts in the 1990s, when several hundred savings and loan institutions failed.
The needs are great. Some CMBS special servicers, for example, have retained Savills to value and market their assets. In other cases, real estate investment trusts need to raise their liquidity levels either through the sale of assets or by bringing in joint venture partners.
Launched as an investment banking firm in 1996 by Lyons and Gerald Mason, Granite Partners was sold in 2007 to U.K-based Savills PLC. Lyons stayed on as Savills' CEO of North America, based in New York. NREI recently spoke to Lyons about Savills' strategies for its new group.
NREI: How will Savills work in the distressed real estate arena?
Lyons: Domestically, we will be representing clients who have either large pools of assets that need to be sold or have large pools of capital that are looking to acquire assets. Once they acquire the assets, we can help them evaluate, package and sell them. Because of our global capabilities and reach, we also will be able to bring in capital from overseas to participate and take advantage of the opportunities here.
NREI: Are you anticipating a spike in real estate-related bankruptcies?
Lyons: There will be increases in real estate-related bankruptcies in the near term. Many investors acquired assets with tenants and rents in place. Depending on the product type, there is a possibility that many tenants will either reduce the space they have, or vacate. Or if they still need the space, tenants whose businesses have suffered will require a rent reduction. Lenders are going back to more traditional standards of lending. That will require many borrowers to provide additional equity when they refinance, which will make it very challenging for many owners to hold onto their assets.
NREI: Will banks take over many commercial real estate properties?
Lyons: If you go back to the savings and loan debacle, what you had was a situation where the government took over the banks. The government either took over the assets or the mortgages — and the mortgages were whole loans. Today with securitization, those CMBS mortgages have been sold into tranches, and they are not held in just a few hands; they could be held in multiple hands. That presents unique challenges [in terms of workouts], and we are all waiting to see how that will unfold. What are the rights of special servicers?
NREI: Which property type is most at risk for bankruptcy-related situations?
Lyons: Retailers are at risk at the moment because the American consumer, who has been the engine of this tremendous boom of the last couple of years, is finally tapped out. Everybody across the board is anticipating a very weak holiday sales season. So you have retailers that are already stressed, having weaker sales, having to put items on sale earlier and at a greater discount to move that product.