20 Year Projection for Debt Workouts

Editor’s Comment: Lawyers Take Notice! This is a career, not just a niche.
Real Estate Bull Laub Sees Unprecedented Workout From Bad Debt

By Beth Williams and Stuart Bern

Jan. 13 (Bloomberg) — Kenneth Laub has been through three commercial real estate boom and bust cycles during almost five decades as a broker and consultant to corporations such as Hess Corp. and International Paper Co.

He says the current downturn will overshadow all of the others, Bloomberg Markets reports in its February 2010 issue.

“It won’t be a typical part of a cycle where we’re down for two or three years and things recover,” says Laub, 70, whose New York firm, Kenneth D. Laub & Co., says it has handled more than $40 billion of real estate transactions since its inception in 1969. “It will be longer than we’ve gone through before.”

As in past slumps, the weak U.S. economy is curbing demand for commercial space, increasing vacancies and causing rents and property values to fall. The key difference today is the explosion in debt financing and related derivatives that fueled a run-up in commercial real estate prices in the 2000s, Laub says. That’s left property owners struggling to make mortgage payments. The overhang of debt will delay any recovery, he says.

“It’s not a supply-demand thing; it’s an overleveraged condition,” Laub says.

Laub, who scaled back his operations in 1997 amid a battle with thyroid cancer, now monitors the market from his office at his four-story town house on Manhattan’s Upper East Side. He says that some deals that piled on too much debt were done with a lack of foresight. “Some of this stuff could have been avoided,” he says.

Wave of Restructurings

Laub expects a wave of restructurings by troubled commercial borrowers as hundreds of billions of dollars of loans come due annually during the next few years. Commercial real estate may still be recovering a decade from now, he says. “What you’re going to see is a tremendously long workout period unprecedented in commercial real estate in this country,” Laub says. “That’s where we’re going, and it’s just beginning.”

U.S. commercial property prices have plunged more than 40 percent from their October 2007 peak, while the default rate on commercial mortgages more than doubled in the third quarter of 2009 to 3.4 percent from a year earlier, according to data compiled by Moody’s Investors Service and Real Estate Econometrics. Landlords in the U.S. will confront office vacancy rates approaching 20 percent this year as employers hold off hiring, commercial property broker Jones Lang LaSalle Inc. predicted in mid-November.

As bleak as Laub’s outlook is, he sees a silver lining for investors who have cash on hand and are willing to wait as long as a decade for bets on U.S. real estate to pay off. “There will be giant opportunities that come out of this,” he says.

Bargain Hunters

Hedge funds, foreign investors and real estate companies will step in and take advantage of falling property values to make acquisitions at prices as low as one-third of their peak 2007 value, Laub predicts. “Wouldn’t you like to be in their position?” he says. “The money is going to talk.”

New consulting and advisory services will emerge in the industry as property owners seek ways to restructure their finances, lure tenants or sell off stakes to prospective buyers, Laub says. “We’re going to have a lot of new services that are going to evolve, things we haven’t seen or done before,” he says.

Laub found his calling in real estate almost 50 years ago. Born in Brooklyn and raised on New York’s Long Island, in Cedarhurst, Laub held jobs from the age of 13, starting as a grocery clerk and then working as a cabana boy and a tennis instructor at a local beach resort and country club during high school. “My father gave me a bar mitzvah, and that’s the last money he ever gave me,” he says with a chuckle.

Cornell to NYU

At first, Laub was set on becoming a veterinarian, so he enrolled at Cornell University’s College of Veterinary Medicine in Ithaca, New York, in 1956. A year-and-a-half later, after achieving passable though not top marks, he changed majors and transferred to New York University in Manhattan. He earned a degree in business while captaining NYU’s bowling team, graduating in 1960.

Laub says he was drawn to real estate because of what he could learn on the job — and for the potential for making money. He joined brokerage firm Collins Tuttle & Co. as a trainee. “There was a rainbow out there to make a lot of money and get an education,” Laub says.

In 1963, Laub moved to New York developer Tishman Realty & Construction Co. He started in the leasing department and helped Tishman to develop a brokerage and consulting arm before leaving to start his own firm in 1969. Specializing in tenant brokerage — representing corporations in need of office space in New York and nationally — Laub attracted clients such as American Airlines Inc. He placed some of the first tenants in the World Trade Center’s twin towers.

Power Broker

By 1987, Laub’s company had the largest average transaction size — $183 million — of any U.S. broker, according to an analysis by a unit of the firm now known as Deloitte LLP. Laub says he is currently representing an investment-banking firm seeking 500,000 square feet (46,000 square meters) of space. He declined to provide further details.

In his spare time, Laub enjoys golf, tennis and writing songs. “I enjoy the act of creating,” he says. In November 2008, he helped direct a musical tribute to New York at Carnegie Hall that included standards and his own songs performed by Broadway stars and Laub himself.

Laub says the current downturn doesn’t shake his faith in New York’s prospects. That goes for the commercial real estate industry as a whole, even with the painful round of restructurings he foresees.

“We’re the last to feel it and we’re the last to recover and we’re just starting to feel it,” he says. “My only thing is to be an optimist and look forward to being part of the workout in this difficult period.”

To contact the reporters on this story: Beth Williams in New York at bewilliams@bloomberg.net; Stuart Bern in New York at sbern1@bloomberg.net

4 Responses

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    Steve
    99Libra@gmail.com

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