Loan Market Needs 'Creative Destruction'

The market for distressed commercial real estate loans could benefit from some "creative destruction," according to Tobin Cobb, co-CEO of LNR Property.

In a video interview with REIT.com at a Real Estate Luminaries Series event on April 19 at Georgetown sponsored by NAREIT in conjunction with the McDonough School of Business, Cobb offered his insight on the state of the commercial real estate loan market. He noted that those who had lived through the Resolution Trust Corp. era were expecting a higher level of activity in the market.

"We haven't, obviously, seen anywhere near the level of liquidations of distressed debt that we collectively had expected based on the majority of our experiences collectively from the Resolution Trust era," Cobb said. "A great deal of capital was raised to face off against that pending opportunity, which clearly has not taken place."

Until the market experiences a period of what he termed "creative destruction," activity will remain stalled, according to Cobb.

"You've got to kind of tear down and believe that you are investing at real value before you're prepared to invest," he said. "If assets are being held around you in bank land at prices that you believe are unnaturally high, you're very reluctant to go in and invest in an asset, even if you think you're getting good value today, because you don't know if a flood of assets is going to be coming in against you at prices that might reflect real values."

To date, Cobb said LNR has been a reluctant buyer of distressed loans. Despite bidding on more than $15 billion in loan assets in 2011, the firm only purchased less than $100 million. The majority of the assets that LNR bid on traded to companies that had raised billions of dollars of fresh capital, he said.

"I would contend that much of that was put to work at yields that were not representative of good risk return," Cobb said. "I believe that those firms had such enormous war chests that if they didn't put it to work, they were going to lose it and they weren't going to earn any fees. We were more disciplined in that regard."

On the other hand, LNR did sell off some of its commercial mortgage-backed securities loans aggressively. "I felt like this is a great opportunity for us to do the best job that we can do for the investors for the trusts that we're serving on or for our own capital to sell into this whole loan bid than to buy," he said.