By Christopher M. Wright
Name: Tim Callahan
Title: CEO, Callahan Capital Partners
Born: 1950
Experience: Former CEO of Trizec Properties and Equity Office before forming CCP in 2006. Staffed primarily by members of Trizec’s executive team, CCP purchased a portfolio of Denver office properties from Blackstone in 2007, a portfolio Callahan managed at Equity Office. Prior to this experience, Callahan served 14 years in lending and investment banking at Chemical Realty Corporation, a division of Chemical Bank, eventually rising to senior vice president. Subsequently, he became director of development, Northeast region, with the Edward J. DeBartolo Corporation in Youngstown, Ohio, and then CFO of Equity Group Investments. Callahan has a B.A. in pre-professional studies from Notre Dame and later attended New York University’s School of Business. |
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Commercial real estate has gone from a wall of capital to hitting the wall in terms of funding availability. Tim Callahan was CEO of two former REITs, Trizec Properties and Equity Office Properties Trust, and now runs his own private equity firm, Callahan Capital Partners.
From his unique vantage point, Callahan shares his thoughts with Portfolio as to how long the credit crunch will continue, what’s filling the void left by the collapse of CMBS issuance and how the capital markets will change as a result of the current crisis.
Portfolio: How does the current environment compare to previous historical periods?
Callahan: Liquidity is the lifeblood of our business. I’ve been in this business since the mid-1970s. In the early 1980s, people were paying 20-something percent interest, but at least they had access to capital. The worst time is when you need liquidity and can’t achieve it. That was the story of the early 1990s when the capital markets shut down and a lot of real estate companies went public, because it was the only capital they could get at the time. Then 10 to 15 years later, there was more capital available for commercial real estate than ever before.
Now we are in a period of dislocation and everyone is focused on when it will end. Ironically, we have more equity capital committed to our business now than ever before, but the cost of capital really determines how much you can pay for property, and that’s a mix of debt and equity. Obviously, the debt side is still pretty difficult.
Portfolio: Would you say we are in the beginning, middle or end of the credit crunch?
Callahan: We’re in the middle, but it could be a long middle. There have been indications that the market began to stabilize a month or two ago, but you never really know if there will be another shoe to drop. It was a good sign when Citi was able to negotiate to sell $12 billion of its balance sheet debt to private equity firms.
There has been a lot of liquidity in private equity sitting on the sidelines waiting to come back into the debt markets and looking for some floor on pricing. However, there was more fear than optimism and this may have marked the beginning of normalization. Not that things will go back to the way they were over the past several years. Debt capital will be available, but it’ll be more expensive, making the next environment more like it was three or four years ago.
Portfolio: When will we know that the credit crunch is over? Is there something specific you’re watching for?
Callahan: First, you’ll see more large banks able to place hits, as further write-downs are likely, but people generally expect this will be the case and are just hoping the worst is past.
As banks sort things out and become convinced over time that the problems have receded, you’ll start to see some degree of new CMBS issuance. The sign of it really being over will come when we’re back to significant issuance on the CMBS side. It will come back to fill the volume for refinancings, if nothing else. That can’t be done by the balance sheet lenders alone.
Portfolio: How else will the next environment be different?
Callahan: The balance sheet lenders were squeezed out because of the competitiveness of the CMBS product, but I expect them to be a bigger percentage of the business going forward. CMBS will be a viable option again at some point, but with different underwriting standards. Therefore, the balance sheet lenders will be more competitive. When refinancing and transaction volume normalizes, you’ll see a different combination of CMBS and balance sheet lenders than before. Additionally, the marketplace will go back to more normal underwriting standards. Lending won’t be as heavily levered or as aggressively priced as we became accustomed to. Bank credit officers won’t forget what has happened any time soon. There’s going to be significant discipline and tighter standards on the bank side for a long time to come.
Christopher M. Wright is a regular contributor to Portfolio.
