Some commercial property bargain-hunters early

By Al Yoon

NEW YORK (Reuters) - Recent buyers of the riskier portions of commercial real estate loans and securities may have been too hasty in snatching up the downtrodden assets, according to Marathon Asset Management's Scott Schwartz.

Wall Street investment banks have been successful in selling "B-note" and "mezzanine" parts of commercial property assets, suggesting some investors of distressed assets have decided prices have fallen far enough, Scott Schwartz, head of commercial real estate at Marathon, told the Reuters Global Real Estate Summit in New York.

But such assets may still suffer as financing for commercial projects remains tough to win, and the asset quality may erode as the U.S. economy slows, he said.

"One of the fears I have is people jump in too early," he said. "There's certainly is a lot of capital out there and some people dove into this B-note (and) mezzanine space, in my mind, too early."

Commercial mortgage-backed securities (CMBS) were pummeled earlier this year as investors speculated loose underwriting and a softening property market would create losses. Prices have improved since March after the Federal Reserve took steps to encourage bank lending and as investors bet commercial real estate would see low, albeit rising, delinquencies.

An index of "BBB-" rated CMBX was priced at a yield spread of 1,725 basis points on Monday, up slightly from Friday but down from more than 2,250 in early March, according to index administrator Markit. The yield spread was less than 1,000 basis points in December.

Investors have been stockpiling money for distressed purchases for months, though few have put the money to work, analysts said. An investor trying to prop up an asset at an unsustainable price only prolongs the process of finding levels that more investors agree represent adequate compensation for the risk taken, they said.

A problem is that the spread between what a buyer wants to pay and what the seller wants to get are far apart, making it difficult to mark a precedent for future transactions, said David Tobin, a founder of Mission Capital Advisors, which connects sellers and buyers of commercial and home loans.

"There are millions of dollars out there for distressed investors, but the pricing isn't there yet," Tobin said in a recent interview.

To be sure, Marathon has taken advantage of price drops and purchased higher-rated commercial mortgage-backed securities, mainly in the "A-" to junior "AAA" rated areas, Schwartz said. Commercial real estate is beginning to show cracks, but overall the assets have been wrongly dragged down with the meltdown of the residential mortgage market, he said.

Marathon, which manages nearly $12 billion in assets, in March also launched a new fund to invest solely in commercial real estate assets, a source said.

"We are opportunistically investing in CMBS," Schwartz said. "You can buy at pretty steep discounts today," he said.

(For summit blog: summitnotebook.reuters.com/)

(For more on the Reuters Global Real Estate Summit see ID:nSP31448)