Is There a Way Out for CMBS through REITS?

Found on Reuters Blogs. I was beginning to wonder when opportunistic funds would show up at the party. American REITs are starting to show some initiative in the new commercial real estate market by setting up funds to buy up distressed properties and loans and to take advantage of drastic reductions in US CRE prices.

Essentially what’s happening here is that debt (in the form of CMBS) is being rolled over into equity (in the form of REITs). This is a good thing, and I hope we see much more of it.

This is a two-stage process, I think: first the REITs will buy up distressed CMBS at a discount, then they will wait for those CMBS to default, at which time the REITs will take possession of the collateral — the commercial real-estate securing the CMBS. In other words, the REITs — and the REIT investors — aren’t looking at yields, they are looking at property values. - Felix Salmon (Reuters)

Phil Wahba and Ilaina Jonas (also of Reuters) report:

Several large investment firms are creating new lending companies that plan to go public to raise billions of dollars to take advantage of the distress in the commercial real estate market, and more are on the horizon.

The planned IPOs, which include units of firms like Apollo Management and Alliance Bernstein, could be just the beginning of what some bankers expect to be a boom in Real Estate Investment Trusts (REITs) going public over the next few years.

This could be part of a larger solution as billions of dollars in mortgages and securities in the commercial real estate sector come up for renewal over the next few years; possibly reducing the effect of so much capital evaporating all at once.

I'm excited to see some creative uses of equity at a time when so many seem certain that the sky is about to fall on commercial real estate. I've said it before, and I'll keep saying it, opportunity exists for those willing to take a good look around and take some calculated risks. Investment fundamentals don't change, just rates of return.