Distressed US real estate deals have yet to take off

Opportunistic investors have been waiting months for the economic downturn to spark fire sales in the real estate industry. But despite double-digit vacancy rates and sharply reduced rents, distress deals have been few and far between.

"I keep hearing that there are going to be cracks in the ice . . . that the delinquency numbers will go up, but I'm not getting the calls," said John Levy, who runs a Virginia-based real estate investment bank. "We're less leveraged then we were the last time around, and rates are lower. Floating rate deals have been more common in recent years, (and) other owners have been able to refinance."

Most companies have been able to hold out for respectable prices. Citigroup recently sold its New York headquarters building to Boston Properties for a hefty Dollars 1.06bn, or Dollars 631 per square foot, even though the deal was hastily arranged.

But better opportunities may arise from bankruptcies of corporate property owners, such as Worldcom, and from the unwinding of synthetic leases, a structure that has fallen out of favour because it was used by Enron and other companies to move real estate off their balance sheets.

Property-linked debt is another option. Mr Leavitt has invested in municipal bonds linked to airport real estate which fell to distressed levels as travel, and airline earnings, declined.

There are also cases in which real estate companies have not been able to cope with lost tenants. M&J Wilkow, a Chicago-based firm, bought a California mall at a deep discount last year because the seller had lost Montgomery Ward as a tenant. But, with Target as a new tenant, it turned the property around.

Investors are finding bargains in out-of-favour sectors as well. Blackstone Real Estate Advisors in January purchased Homestead Studio Suites Hotels for Dollars 740m, noting it liked the "moderate" prices of the extended-stay sector, as well as its long-term outlook.

Homestead, which continues to operate as its own entity, snapped up the portfolio of a Dallas-based suite owners last month.

Starwood Capital Group has attracted investors such as William A.M. Burden, a family office representing the Vanderbilt heirs, to senior housing, a sector that began trading at a discount after several funds lost money in it.