Reggie Middleton's Boom Bust Blog

Yet the discounts these lenders are offering are anything but generous. During the real-estate collapse of the early 1990s, some commercial debt sold for pennies on the dollar. Back then, though, the default rate was more than 20% and distressed funds didn't start buying huge blocks of assets, primarily from the government's Resolution Trust Corp., until more than a year into the crisis.

Today there are already at least 55 active or planned commercial real-estate debt funds seeking to raise $33.8 billion, according to Real Estate Alert, a trade publication. And many have begun to do deals. This is my point. Buy buying too soon, I think many of these guys are overpaying and may not be compensated for their risk. Another bubble, before the current one is fully deflated??? You know what that means...

Guggenheim Partners LLC's $1.25 billion real-estate debt fund, raised in December, has so far closed on or committed to more than $2 billion of investments. Edward L. Shugrue III, manager of real-estate debt funds for the firm, said the fund recently purchased $100 million of investment-grade CMBSs backed by office buildings formerly owned by Equity Office Properties -- at discounts ranging from 10% to 15% -- from a liquidating investment vehicle affiliated with a foreign bank.

Fund managers believe they will still be able to hit their return objectives because most of the real estate underlying the loans is healthy. (The national default rate on commercial mortgages is a slim 0.4%.) Eventually, they hope, that will drive up the value of the debt. But the risk is that a serious economic downturn could drive up delinquency rates. Rigghhhhttt. This debt, especially on Equity Office Properties, was written at cap rates pushing zero!!! You need a 10-15% discount to start approaching what normally would have been a prudently priced loan. Then, you must realize that the national default rate is so slim because we are coming off of a historically easy credit market where everybody in trouble just refinanced instead of the defaulting. Default rates are now going to skyrocket, and it doesn't take a skyrocket scientist to figure this stuff out. Just study a few historical charts, facts and figures. Come on guys, I'm not that bright and I can figure it out. Maybe this might be a buying opportunity for me???

"We only take on risk we know how to manage," said Bradford Wildauer, a partner who heads the debt investing business for Apollo Real Estate Advisors. The debt fund that the firm closed a year ago, with $625 million in equity capital, has so far committed to about $900 million of investments.