Paula C. Squires
The pain isn’t over. As the country tries to recover from a credit crisis that required massive government intervention, the commercial real estate industry should brace itself for a bumpy ride. Sales of retail and commercial properties are down, and price corrections are expected to continue as the country heads into a recession this quarter.
That was the overriding message yesterday by capital market experts who spoke during the 18th annual Real Estate Trends Conference. Sponsored by Virginia Commonwealth University, the event drew 800 real estate professionals, breaking previous attendance records. “What a difference a year makes,” quipped conference chair Bruce A. Kay. “Last year we were talking about new urbanism … Today, it’s all about the money.”
Or, more precisely, the lack of it. Now that the superhot, over-leveraged subprime market has burst its bubble, the cost of capital for real estate projects is high and availability is low, noted keynote speaker Sally Gordon, managing director at BlackRock, the country’s largest asset management firm. “The CMBS [commercial mortgage-backed securities market] is history. What we’ll see going forward will be different than in the past.”
Gordon said covered bonds, used widely in Europe, might be one way to help restore capital flows. These debt securities are backed by a pool of assets that “covers” the bonds if the issuing financial institution becomes insolvent. Since originators must hold the bonds on their balance sheet, they are responsible for ensuring that the pool consistently backs the bond.
Asked about the government’s actions to shore up the banking industry — which moderator John Levy referred to as “The No Banker Left Behind Act “— Gordon responded that a more systemic approach was needed. The challenge now, she added, will be to take finite sources and decide how many banks can be helped.
The federal government announced yesterday that the U S. Treasury Department will use up to $250 billion of the $700 billon bailout deal to buy non-voting shares in some of the nation’s banks as a way to help restore lending.
Meanwhile, a lack of capital for real estate deals has caused a big drop in transaction volume. For the first nine months of 2008, the number of commercial real estate sales in the U.S. was down by 74 percent compared to the same time last year, said speaker Robert M. White, president of Real Capital Analytics of York, a company that tracks commercial real estate markets around the world. “Of $20 billion in office properties that was supposed to close by September, less than $7 billion has closed,” he said. Plus, 3 percent of the deals that closed in the third quarter came from distressed sales, according to White, with more sellers than buyers across the board for all commercial real estate categories. “No big group of buyers has stood out to get the market going again.”
On the equity side, there are still some pockets of capital available from pension funds, said speaker Geoffrey Dohrmman, president and CEO of Institutional Real Estate Inc. in San Ramon, Calif. However, real estate companies shouldn’t look to the funds as a big source. For the near future, Dohrmann portrayed a grim picture. He said an additional 1,000 regional and community banks are poised to fail, while increased defaults on home mortgages are driving down U. S. property values.
To help the capital markets, Dohrmann offered several possible solutions, including:
• Reinstating a provision of the 1933 Glass-Stegall Act (repealed by Congress in 1999). This would once again separate commercial and investment banking.
• Eliminating the mark-to-market accounting method, which critics say is worsening the credit crisis. Under this standard, a wide range of assets are valued at current market prices. So the value of mortgage securities — even those carrying AAA ratings — has to be written down on the balance sheets of financial institutions that hold them, shrinking capital bases and the amount available for lending.
Moving forward, Dohrmann said, “We’ll have to go through this deleveraging and feel some pain.” Cash will be king, he predicts, and people in a position to buy reduced-price assets will be able to make a lot of money. “The real lesson here is not that the world is falling apart … but that the base underneath us is shifting.”
The speakers did have some good news. As a capital city in a state experiencing population growth, Richmond is well positioned for commercial real estate projects when the market recovers. In fact, Richmond was one of 120 cities worldwide last year that saw more than $1 billion in commercial property acquisitions. In 2008, only 20 cities are expected to hit that level.
As a child my mother would say to me, “Jay, make sure you study your history, because history will always repeat itself”.
And the first time she said that to me I was confused. So as a child, I asked her how can that be? It already happened, so how can it happen again?
And she said, “History will repeat itself. It may wear a different hat, or a different coat, but it will be back, knocking on your door once more. So Jay, study your history and you will see things coming before anyone else can.“
I have to tell you, it took many years before my mother’s wisdom would make sense to me. But, with our current economy, and stories like this I am once again reminded how right she was.
How is it all of those smart people you reference in the article don’t see what I see? Is it because I am just a simple Commercial Mortgage Broker, lost in a sea of Big Banks and self-proclaimed financial experts?
Hardly! But allow me to enlighten the experts.
THERE IS STILL PLENTY OF COMMERCIAL MORTGAGE MONEY AVAILABLE! YES, PLENTY!
Do you recall the Savings & Loan Crisis back in the 1980’s? Do you recall how PRIOR to the S & L Crisis everyone who needed a mortgage went to their local Bank to get it?
But when the Crisis hit Banks stopped loaning money. Of course they did. And from the ashes of the S&L;Crisis Residential Mortgage Brokers rose, and eventually took the market share of the business from the Banks.
Fast forward to our current Economic Crisis.
You cannot get Commercial Financing at your Local or Regional Bank. They simply say “no”. In fact, some of these Banks are even unloading their Commercial Paper and exiting the market completely.
And from the ashes will rise the Commercial Mortgage Broker.
Why? Because I HAVE THE MONEY!
If you keep asking the wrong people, you will think there’s a crisis. There is NO COMMERCIAL MORTGAGE CRISIS.
JUST A LOT OF CONFUSED PEOPLE WHO DO NOT KNOW WHERE TO TURN FOR HELP. And because they are hearing the word “no” from all of the Banks, they assume it must be true.
It’s NOT!
Our business is up over 75% from last year. And I thank the Banks for that. And, because they have failed to read their history lessons, you will find more Commercial Mortgage Brokers like me not only survive, but thrive during this economic downturn.
And for those smart enough to know their history, and those determined enough to not let what others say stop them, there will be Business Owners, Entrepreneurs, Professionals and Developers doing very well in this market.
But here’s the important thing to remember. PLEASE tell your readers, the Business Owners, Entrepreneurs, Professionals and Developers that THERE IS COMMERCIAL MONEY AVAILABLE.
The media is failing Business Owners, Entrepreneurs, Professionals and Developers by not telling the whole story.
Stop playing on the markets fear and making the problem worse, and start becoming part of the solution by accurately telling the whole story.
Maybe if you do that, the history of our recovery from this economic mess will be sooner, rather than later!
--Jay Estis of Across the United States...
Oct. 15, 2008 at 03:15 PM