December 13, 2009 5:59 AM

Cleaning up after real estate debacle

New crop of investment banks poised to fill a need.

By Theresa Agovino

REINCARNATED: Old Lehman hand David Lazarus has set up shop at EdgeRock. Veteran real estate investment banker Alexander Rubin says he's working harder today than he has in years. Back in June, he joined boutique investment bank Moelis & Co. to start a real estate banking practice. Since then, he's been working 12-hour days that regularly start with 5 a.m. conference calls to Australia.“We are building a business from scratch,” he says. Little more than a year after the great real estate crash, a whole new crop of specialized investment banks like Moelis are bulking up to help property investors and owners survive the avalanche of soured real estate deals that is only just beginning. Over the next five years, nearly $1.5 trillion in real estate loans will come due. According to Richard Parkus, head of commercial real estate debt research at Deutsche Bank Securities Inc., there will be only enough capital to refinance 40% to 50% of those.Among the firms jumping into the game are Cantor Fitzgerald and Broadpoint Gleacher Securities Group. In addition, business advisory firm FTI Consulting and investment bank Compass Advisers have joined forces to launch EdgeRock Realty Advisors, a real estate-only investment bank. Meanwhile, giant real estate brokerage CB Richard Ellis Inc. has expanded its London-based investment banking business to America. The new entrants see a gold mine in helping clients restructure loans, find alternative sources of capital, form partnerships or sell assets.“There is certainly going to be a need for specialized knowledge,” says Tom Geurts, director of economic affairs at New York University's Schack Institute of Real Estate. “A lot of the big banks have been marginalized, so there is an opportunity for [the new entrants] to create a niche.”

Best of old and new

To establish a toehold, the upstarts are trumpeting their small size and freshness as advantages. They're also contrasting their objectivity with older rivals' tangled allegiances and piles of bad loans.The catch is that most of the banks' personnel are veterans of those big institutions.EdgeRock Senior Managing Director David Lazarus probably carries the heaviest baggage. He was a top banker in Lehman Brothers' huge real estate arm—the unit whose collapse played a key role in the bank's bankruptcy.“Being from Lehman is not without its collateral damage,” says Mr. Lazarus. “But when clients make a decision about coming here, they are making a decision about me as an individual.”Tim Callahan, president of Callahan Capital Partners, real estate investors, is among them.“I view Lehman experience as a positive, because the company was in the thick of everything,” says Mr. Callahan, who hired EdgeRock to provide strategic consulting services. Mr. Callahan also signed up because he wanted attention from top executives.“We are a small firm, so I can't expect to be high on anyone's priority list,” he says. EdgeRock is the only completely new firm. Its peers are all new divisions of broader, existing businesses, and as such are able to pitch not only their new hires but their old strengths.

Hiring spree

In the last year, Moelis, for example, has hired 100 professionals to expand into new service lines including real estate. Mr. Rubin points out that not only can he tap the firm's other professionals to help handle the real estate transactions, but the company has $2 billion to invest.“We can offer advice and capital,” says Mr. Rubin, who notes that Moelis had done a few real estate deals before, but it wasn't a focus. Former Wachovia banker Steve Hentschel, who was hired to lead Broadpoint Gleacher's real estate practice, also plans to tap his new employer's existing talent to serve clients. He says that while the bank can offer a full range of capital markets services, its immediate emphasis will be on restructuring, mergers and acquisitions, and raising private equity. Broadpoint has already been hired by deeply troubled REIT Crystal River Capital to develop a strategic plan that could include selling assets or even selling the company outright.“In a market like this, there is an openness to listening to
new ideas,” says Mr. Hentschel.Cantor Fitzgerald also enters the real estate market with a formidable range of offerings, after eight years of bulking up beyond its traditional strength in the bond markets.“We will offer full service,” says Anthony Orso, one of three former Credit Suisse real estate bankers hired within the last three months at Cantor.For CB Richard Ellis, the key advantage is the firm's globe-straddling network of brokerage offices. To corral that strength, CBRE hired three bankers from J.P. Morgan in the past three months to launch its bank.“We wanted to provide a broad class of services to our clients,” says Greg Vorwaller, chief operating officer of the company's capital markets group. “We need an investment bank to do that.”