Commercial Real Estate "Black Hole"

Thought it was relevant. Seems the worst is yet to materialize. I'm a glass half-empty kind of guy, so this is no real surprise. From an agent perspective, I find myself pushing back on more listings these days as owners can't/won't keep up with the dramatically changing landscape with regard to property. Apollo Management owns the brand I work for (Coldwell Banker Commercial).

Banks warned on commercial property ‘black hole’

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By Henny Sender in New York

Published: March 19 2009 21:06 | Last updated: March 19 2009 21:06

A “black hole” in the US commercial property market is set to put further pressure on troubled banks, the head of leading private equity firm Apollo Management has warned.

Leon Black, founder of the firm, said the extra costs of cleaning up the US banking industry could total as much as $2,000bn, putting further strain on the economy. He said the woes of the commercial property had not yet been reflected fully on bank balance sheets.

“You have the black hole of commercial real estate and that hasn’t happened yet,” said Mr Black in a wide-ranging interview on FT.com.

“There you are sitting with $4 trillion of debt and you know not all of it’s bad but a lot of it is diminished and that really hasn’t yet been addressed.”

He warned it would be 12 to 18 months before there are lasting signs of US economic recovery.

Apollo, a firm established in 1990 that combines buy-out activity with investing in the debt of troubled companies, is in better shape than many of its competitors. It has at least $13bn to invest at a time when it is almost impossible to raise new money.

Largely because the banks are not providing financing and the capital markets are not open, Mr Black conceded that “conventional private equity right now doesn’t exist ... Conventional buy-outs are really not on the table right now”.

Mr Black warned in February that traditional buy-outs were “essentially dead for the time being” and claimed “the big public-to-privates are gone the way of the dodo”.

During the boom years, which ended abruptly in 2007, Mr Black took advantage of cheap and flexible debt to buy companies, pay his investors dividends and then sell these acquisitions as he did with Intelsat.

Now, as some of the companies he owns, such as Harrah’s Entertainment, have been hard hit by the recession, he is spending much of his time reducing their debt burdens.

“The name of the game is survival, it is too live to play another day,” said the veteran of now defunct Drexel Burnham Lambert, which pioneered the business of raising debt for less creditworthy firms.

While many private equity firms are looking at investing in debt of troubled firms – an area that Apollo has long been involved with – Mr Black is exploring the market for non-performing loans in Europe.

Copyright The Financial Times Limited 2009