Could credit crunch be merely a 'myth'? - director of capital markets for Arthur Andersen Real Estate Services Group, Robert Davis, scrutinizes credit issues in commercial real estate market

Real Estate Weekly, Dec 16, 1992

Renewed interest by institutional investors, growing liquidity as a result of debt securitizations, IPOs and new REIT offerings signal that "the commonly held view that the commercial real estate market is still afflicted by a 'credit crunch' is a myth," according to Robert Davis, worldwide director of capital markets for the Arthur Andersen Real Estate Services Group (RESG).

"Instead, we have a 'pricing crunch' where real estate is being re-valued and re-priced across the board to compete favorably with other investment categories in order to attract capital. This is being accomplished in such a fashion as to rejuvenate the confidence of the global capital markets that there is an appropriate return on real estate, given the "true" risk of this asset class."

As an example, Davis notes that there may not be a buyer for a hotel that is being sold at a seven percent cap rate, but there may very well be a number of investors who are .willing to pay for a hotel that is yielding a cash-on-cash return of 12 or 14 percent.

An added factor which is starting to stimulate more activity in the "primary" purchasing market for real estate is the growing liquidity that is occurring visa-vis debt securitizations, IPOs and new REIT offerings. The benefits of this securitization process are substantial in that properly structured and underwritten assets can be efficiently placed in the secondary market which, in turn, creates new liquidity for the primary market.

Re-pricing and sale of loan/OREO portfolios, however, may not always be the most strategic alternative for financial institutions, Davis warns. A thorough analysis of the cost/benefits, executional viability and timing parameters of various disposition alternatives-- such as a bulk sales, sealed-bids, auctions, formation of REITs or debt securitization versus restructuring -- must be undertaken.