Competition tough in failed bank real estate asset auctions

By Paritosh Bansal

BEVERLY HILLS, California (BestGrowthStock) – Bidding on real estate assets of failed banks has become aggressive, as investors searching for distressed opportunities in the sector, wait in vain for property to come to the market.

“We were all joking that the distressed cycle lasted about two months,” said Barry Sternlicht, chief executive of Starwood Capital Group, at the Milken Institute’s Global Conference. “The flow of capital is staggering right now to the property markets, including the debt markets.”

Starwood, a U.S. private equity firm which has its roots in real estate, teamed up with other investors to buy a pool of assets of failed Corus Bank in October and has been beaten while competing for other assets by wide margins, Sternlicht said.

In a recent FDIC auction, Starwood, bid 57 cents on the dollar for the assets, while the winning group bid 81 cents, Sternlicht said.

In the Corus deal, the Starwood group paid about 60 cents on the dollar. Corus had a large portfolio of distressed construction loans, many of them tied to condominiums.

“Rich and I were talking, we should just sell the entire Corus book right now,” Sternlicht said, referring to co-investor Richard LeFrak, CEO of LeFrak Organization. “There is craziness going on right now.”

Investors have rushed into the sector looking for bargains but the distressed properties that they were expecting to emerge from the financial crisis never came to the market.

“The failure we were all anticipating in the commercial real estate market did not happen. We blinked, it went away,” LeFrak said at the panel on the commercial real estate sector. “We have not been able to see much property emerge.”

Sternlicht said the money would get taken out of the market if the Federal Reserve raised interest rates, which he expected would happen after the elections in November.

“It would be so good for the Fed to raise rates right now so that they give you a reason to hold on to cash,” Sternlicht said. “But because of our political election they are not going to do it till November, and then I think rates go up 200-300 points, fast, I hope, or the dollar will crash.”

Others, however, were not so sure that rates would rise after the elections.

Lefrak said interest rates affected housing prices, and raising them could lead to another decline, which would hurt consumers and the economy.

“If you raise the rates up to 7-8 percent again on 30-year mortgages there is going to be another slide in house prices, which has a direct effect on economy,” LeFrak said. “People may not actually go shopping.”

Michael Van Konynenburg, president of Eastdil Secured, said the Fed also had more leeway now because of Europe’s troubles.

“The argument against a big raise at the end of November is what’s going on in Europe,” he said. “People will have to pick what currency they want to be in if they don’t want to be in dollars.”

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(Reporting by Paritosh Bansal; Editing by Valerie Lee)

Competition tough in failed bank real estate asset auctions