Errichetti: Simon/GGP No Harbinger

Contrary to popular opinion in some quarters, Simon Property Group’s bid for General Growth Properties is not ushering in a new era of mergers and acquisition activity, according to Michael Errichetti, head of real estate investment banking at Keefe, Bruyette & Woods. “Firms merge for lots of reasons. It can be part of succession planning, expanding a geographic footprint, achieving economies of certain scale in sectors,” he told REIT Cafe. “The unique situation with GGP, however, is it is bankrupt and looking for ways to emerge from bankruptcy and improve value to stakeholders.”

When The Blackstone Group bought Equity Office Properties in 2007, it was the height of mass liquidity and aggressive financing. This facilitated the larger M&A transactions that subsequently happened. “Just because there is a company in your sector that’s smaller than yours doesn’t mean you want buy that company. There is going to be a lot of opportunity in real estate without that,” Errichetti said.

Errichetti, a 25-year veteran who has worked at firms that include J.P. Morgan, also believes that the slow recovery of the U.S. commercial mortgage-backed securities market is making it more difficult for the property markets to recover. “In previous cycles, the CMBS market acted as a cushion and kept the mechanics of the market moving by allowing transactions to trade,” he said. “Today, the CMBS market is inactive, making it more difficult to find financing.”

New real estate funds that are being formed to take advantage of the dislocation in prices will have a slight edge over the more established public players. “If the management team [of the existing company] is excellent, they will not be distracted with legacy issues and can focus on creative acquisitions,” Errichetti added.

by Joanna Randell