Holding pattern

1/26/2009 - If it is always darkest just before the dawn, then morning should be right around the corner for the real-estate industry.

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Watch video of the alumni panel here

Then again, it may be some time yet before the sun rises.

That was the message a panel of real-estate experts delivered to professionals and Kellogg School students at a Jan. 21 discussion at the Kellogg School. The panelists painted a dismal picture of the real estate industry, surmising that investors have money, but are paying down debt and holding onto cash until the market improves.

The panelists, all Kellogg School alumni, offered no predictions as to when the real estate market would bottom out. Transactions are practically nonexistent, they said, because sellers are holding onto property in the hope that values will rise, while buyers are holding onto cash until they believe the market has hit bottom.

Meanwhile, real estate investors are using this waiting period to deleverage and maintain a strong cash flow in their companies.

“For us, it’s cash flow, cash flow, cash flow,” said Erwin Aulis ’82, chief operating officer of Northwood Investors LLC in Greenwich, Conn. “It’s derisking — how do we protect ourselves?”

Lenders want borrowers to pay their debts down significantly or force debtors into foreclosure, said K. Jay Weaver ’95, principal at Walton Street Capital LLC in Chicago.
In the past, banks would battle each other to take on an investor’s loan. But that has changed with the credit crunch.

“Now, it’s how many lenders can you get in on a $20 million loan?” said Robert Underhill ’84, managing director of the capital transactions group at Shorenstein Company LLC in New York.

William Sullivan ’83, chief financial officer of ProLogis Management Inc. in Denver, offered some insight into the industrial real estate market, the company’s specialty.

Industrial real estate has had a good supply-and-demand ratio, which has kept the market steady so far, he said. Even so, Sullivan predicted a massive downturn in the industry this year, driven more by the credit crunch than by an oversupply in the market.

Fear and uncertainty about the economy have caused real estate investors to idle, the panelists noted again and again.

“We all have the money to invest but right now, it doesn’t seem like the time to invest,” Weaver said.

The annual distinguished alumni panel discussion was sponsored by the Kellogg School’s real estate management program, the Guthrie Center for Real Estate Research and the Office of Development and Alumni Relations. The event was moderated by Kellogg graduate Earl Webb ’81, CEO of capital markets at Jones Lang LaSalle in Chicago.