McNellis: A Deal Runs Through It

Fishing for deals proves to be a popular sport across the country.

June 1, 2010

By John McNellis

Remember Brad Pitt fly-fishing in that breathtaking Missoula river? Gracefully casting his rod back and forth, back and forth, and then splashing his fly in the exact spot where the trout lazed? Well, with the spring thaw, every property buyer out there is casting back and forth—some more gracefully than others, few like Brad, yet almost no one is getting a strike. The sellers still aren’t biting. Why? The short answer of course is that buyers—to overwork the metaphor—aren’t baiting their hooks.

For a longer answer, your correspondent has been hip-wading the traditional pools of real-estate wisdom including the annual spring meeting of the Urban Land Institute in Boston. Direct answers were in shorter supply than decorum at a Raider’s game, but the announced good news/bad news was that the recession ended last summer, but every sector of American real estate will remain overbuilt until 2013.

Would-be vultures to a person, the ULI attendees felt a tad better upon learning that the famous Grave Dancer, Sam Zell himself, isn’t finding any cemeteries either. In a public Q&A session, Zell was asked if he had put together a war chest. He shrugged. “What’s the use of having an opportunity fund if there are no opportunities?” he said. Zell is instead investing in retail in Brazil.

The ULI’s various prognosticators—the pundits, sages and seers—attributed the annoying lack of American deals to the weather, more specifically, to tsunamis.

Like the doomsday prophet who pushes back his end-of-world deadline every six months, the pundits were guaranteeing the banks would drop their “amend-extend-and-pretend” strategy any day now and a tsunami of bank real estate would, in the manner of the life-giving Nile, swamp us all with career-saving deals.

The sages took the opposite view: namely, that a tsunami of opportunity funds (except for a few of the waiters, everyone in the banquet hall was starting one) would drive prices ever higher and that good deals would be harder to find than Baptists at a barn dance.

The seers’ crystal ball was more far-reaching—they zeroed in on Washington’s trillions in deficit spending and the certainty that this would one day produce high-teen interest rates and Zimbabwean inflation. More or less like cocaine, they said, it would kill us, but they wouldn’t say when.

One observer (well, OK, me) decided the REO tsunami would smack into the Opportunity tsunami and then the two would wrestle the Inflation tsunami; instead of Armageddon, however, these great forces would counteract one another in the same inexplicable way the opposing powers of the universe always do when the hour is darkest on “Star Trek.” Thus, like Kirk and Spock, we’ll all be fine (if not in a parallel universe wherein life companies actually have to lend to borrowers who need money) and business will be as always: a good deal here, a lousy deal there.

In addition to ululations over the dearth of deals, this spring has been marked by another recurring theme—the need for recurring income. Quite suddenly, even titans of real estate who formerly couldn’t find their local bank branch with MapQuest are now adding the disdained “c” word to their titles. Large and small, developers are swearing to bemused lenders that their life’s ambition has always been to manage troubled assets and be a consultant. While some will no doubt back away from this career pursuit when they learn that being a work-out specialist involves neither gyms nor weights, many will persist. But success is by no means assured. The banks fear the entrepreneurs’ conversion to righteousness will be short-lived and that, at the mere whiff of recovery, their newest employees will desert them en masse. The banks also cleverly suspect—they don’t have all the money for nothing—that many developers and brokers are only angling for the keys to the henhouse so they can be on the inside when the chickens are at last sold.

The ULI cognoscenti also proclaimed that, contrary to early fears, banks and special servicers are not going after personal guaranties on defaulted loans this time around. Instead, lenders are using the threat of these guaranties to keep their borrowers working hard on assets for which they would dearly love to hand in the keys. This could result in further delays for the deal-tsunami pundits: Some of these borrowers—despite themselves—are bound to work their way out, stabilizing their projects and hanging on.

Back in Northern California retail, many of the tenants who have been so absent these past 20 months are at last returning. With retailers in tow, we can start baiting our hooks with more money; hopefully, we’ll get a strike or two.

For more about John McNellis or McNellis Partners, please visit mcnellis.com.