The commercial real estate market got two major shots in the arm last week.
First Chicago Corp. and Fleet Financial Group Inc. announced major real estate initiatives in which they will set aside reserves to sell a total of $2.6 billion of assets. The assets will be written down to an average of 50% to 55% of the original loan amounts, from 75% to 80%.
Real estate experts said the moves narrowed the gap between what banks are asking and what investors are willing to pay for commercial property. And this adjustment could accelerate sales in the moribund marketplace.
Away from |Gridlock'
"What we're seeing is the pricing has finally adjusted to the realities," said S. Michael Giliberto, a real estate analyst at Salomon Brothers Inc. "There's starting to be a movement from what really had been gridlock."
Mr. Giliberto said the two banks were signaling a willingness to sell at prices that would allow investors a good return even if real estate conditions deteriorate further.
Transaction volume, he added, has long been a necessary first step for recovery in the real estate sector.
First Chicago stunned the marketplace with its announcement last Monday that it would take a $625 million charge in the third quarter, enabling it to write down and sell more than $2.1 billion of real estate. The provision would be partially offset by a one-time accounting change for its venture capital portfolio.
Shares Rise on News
Investors welcomed the news, bidding up First Chicago's shares by more than $2 that day, despite the third-quarter loss the action will cause.
Fleet followed two days later with plans to unload $500 million of New England real estate and commercial loans. Fleet said it would offset its reserving charge with a $120 million special gain from the sale of 19% of its mortgage company.
John D. Leonard, a banking analyst at Salomon Brothers, said the strategy was "not for everyone." But a handful of banks have sufficient capital to consider it, he said.
And many others may write individual assets down faster as a result of the actions.
A spokeswoman for First Chicago said the new reserves will enable the bank to entertain "whatever kind of offer comes along." She said the bank still may spin some assets into a separately capitalized "bad bank," securitize some mortgages, provide new loans to facilitate sales, or sell individual projects.
But most outside observers predicted bulk sales like those practiced by the Resolution Trust Corp. as it liquidates the assets of failed thrifts.
The buyers in these RTC transactions are typically partnerships of property managers and big investors like General Electric Capital Corp. or Morgan Stanley & Co., which can to spend $100 million or more in a single deal.
John F.C. Parsons, managing director of Ferguson Partners, a Chicago real estate investment adviser, said these groups "have a relatively short-term strategy. They're hopeful of selling in the midterm."
Mr. Parsons said the banks' actions are "a recognition of where real estate values are today," and put the banks in a favorable light with analysts and investors.
"Absolutely, unequivocably, there's money out there" willing to buy real estate at that kind of discount, added William H. Stern, managing director of Sonnenblick-Goldman Corp., a New York commercial real estate brokerage.
"They're doing the right thing," he said of the banks, "because otherwise they'll have stomach aches for the next few years."
The announcements came on the heels of the latest bulk sales by the RTC and the Federal Deposit Insurance Corp. Both attracted bids higher than they had sought. In one sale, a group led by Mariner Hotel Corp. of Dallas paid the RTC $116 million for a portfolio of hotels.
The bid of 111% to the "determined investment value" set by RTC was another example of the more realistic pricing that is coming into the marketplace, said one banker who specializes in hotel sales.
The other deal, an auction of a large portfolio from American Savings Bank of White Plains, N.Y., also attracted bids above the recommended price, according to market sources. Details were not yet available from the FDIC.
Also stirring optimism last week, was the sale to Mutual of America of a New York office tower sold by Olympia & York Developments Ltd. for a price thought to be significantly higher than other deals in the city.
A syndicate led by First Chicago held a $147 million mortgage on the building, but the bank would not provide details on the settlement. Thomas J. Moran, president of Mutual of America, said the insurer would arrange new permanent financing for the purchase.
Although terms were not officially disclosed, banking sources said a rumored price of $120 million to $129 million means Mutual would pay close to what it would cost to build the space, if the $70 million the insurer is paying for renovations is added in.
Newer, better-equipped office buildings in the city have sold in the past few years at a fraction of replacement cost.
But not everyone is encouraged by banks adopting a fast liquidation strategy.
"You have to ask yourself, in the long run could they do better by holding and waiting for the market to do better," said Leo T. Spang, president of the New England Real Estate Finance Association and a former official of Shawmut National Corp.'s real estate division.
"The bankers won't like me saying this, but is it good for the economy? Is it good for the borrowers?" Mr. Spang asked. He argued that the strategy could backfire by accelerating deterioration in the marketplace.
"New buyers are going to try to maximize the recovery [from each property]. They're not going to be too concerned with the borrower."
Arthur Fefferman, president of AFC Realty Capital Inc., New York,agreed that the investors who buy from Fleet or First Chicago will be able to undercut other landlords.
"You saw that pattern in Houston during early '80s, you're seeing that in New York City, and you're going to see it in California," he said.