The 20 Rising Stars of Real Estate 2008 - (Page 9) Yield spreads on CMBS have soared eight-fold compared with the first quarter of 2007. Stuck with loans they can't sell, lenders are pulling back from new deals. And where credit is available, wide financing spreads can stop a transaction it in its tracks by diverting potential profits into interest expense. Late in January, just four or five CMBS shops were open for business and able to place loans, according to Kenneth Zakin, senior managing director of the capital group at Newmark Knight Frank, a global real estate advisory firm. "They can't lock rate, they can't lock spread and they can't execute," he said, adding that wide spreads have pushed financing rates to unaffordable levels. Recently, Goldman Sachs analyst James Fotheringham predicted U.S. banks will incur $60 billion of mark-to-market losses on commercial real estate-related assets in 2008, including $20 billion attributable to CMBS and collateralized debt obligations that include CMBS. He told Reuters he sees commercial real estate prices dropping 21-26% from current levels. Moody's, meanwhile, sees a decline of 12-17%. "There's a lot of cash out there but, for the most part, deals are driven by financing," Zakin said. To revive the deal business, he believes capitalization rates will move up, forcing property prices down. But he added, "It may be six months from now before we actually see declines hit the pricing. We are not seeing it now." To be sure, would-be buyers of office and retail property are pressuring sellers for lower prices. That has slowed transactions, and compensation in commercial real estate is heavily transaction-based. While Zakin said he's fielding more inquires than ever from both institutional sellers and buyers, the parties usually are so far apart on price that nailing down a deal is next to impossible. POCKETS OF STRENGTH? FPL's hiring and compensation survey found the strongest compensation outlook for 2008 among self-storage facilities, followed by industrial property. Senior housing/healthcare and multifamily developments had the weakest outlooks. At least one recruiter offered a different view. According to Joe Ziccardi, chief executive of New York executive search firm Cromwell Partners, multifamily housing is holding up better than other commercial segments as the economy slows. "There's been a shift away from hotel, office and retail,” he said. “There aren't a ton of deals being done in some of the areas where the most activity was a couple of years ago." A good, seasoned originator of multifamily loans can earn $400,000600,000 a year for originating $100 million-plus in loans, Ziccardi noted. However, he added that as deal volume slows, so must compensation. Unlike residential, commercial lending hasn't really let up from a compensation point of view. "For 2007, they haven't taken their punishment yet,” he said. “I think that's still to come." Activity and compensation have declined among providers of conduit financing - structured deals such as mezzanine loans, bridge loans and preferred equity that are purchased by conduits or real estate investment MARCH 2008 trusts (REITs). "People who were doing that type of loan saw a big reduction in their volume and their compensation in 2007," said Ziccardi. On the other hand, volume is holding steady in the traditional multifamily financing programs of Fannie Mae, Freddie Mac and the FHA. At the real estate groups of investment banks, first-year associates earned an average of $100,000 in base salary and a $200,000-250,000 bonus last year, according to Eric Moskowitz, head of strategic consulting at the Options Group, a New York-based executive search and consulting firm focused on the financial services industry. For vice presidents, salaries averaged $150,000 and bonuses were around $550,000. Those figures were down 10–15% from 2006, and Moskowitz expects a larger decline this year. "A lot of real estate debt is going to mature, and they won't be able to refinance it,” he said. “So these banks are not going to be able to do deals." For dealmakers, fewer deals mean both fewer job opportunities and reduced compensation. Meanwhile, brokers who arrange the sale of commercial properties typically are paid 50% or more of their firm's sales commissions, which may range from a few percentage points of a transaction's value down to a fraction of a percent for the largest deals. Most individual brokers in regional markets like Tampa, Fla., earn between $100,000 and $1 million in annual total compensation. Even in today's credit-constrained environment, hard-working brokers will continue to prosper if their clients are the kind who put up ‘real money,’ according to Paul Lewis, senior managing director at Specialty Consultants, a Pittsburgh-based executive search firm for the construction and real estate industries. Although 100% financing is a thing of the past, cheap financing remains available for buyers "with real cash and a real balance sheet," he said. Lewis estimates that the top one-third of property brokers this year will earn at least 10% more than in 2007. However, the middle third will probably make at least 10% less than last year, and the bottom third will make 20% less. Like most observers, Ziccardi expects commercial construction and sales activity to slow in line with a faltering domestic economy. “Given the state of the economy, what could possibly drive new construction of office buildings, malls, hotels?" he asked. "It’s hard to see the compensation level of these people remaining stable in 2008." i eFinancialCareers serves the global financial community as the leading network of career sites for financial services professionals. Focused on the asset management, investment banking and securities industries, our mission is to provide the best job opportunities, job market news and analysis, salary surveys and career advice. eFinancialCareers connects financial services professionals with employers and recruiters looking to engage with - and hire - the most qualified candidates. For more information, visit www.efinancialcareers.com or call (800) 380-9040. REAL ESTATE RISING STARS 9 http://www.efinancialcareers.com http://www.efinancialcareers.com
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