Real Estate Forum Magazine - February/March 2009 edition
The crowds have cleared from the Lincoln Memorial and all of the confetti along Georgia Avenue has been swept up. Now that President Obama has settled into the Oval Office, commercial real estate leaders are eager to see how the new administration’s policies will impact the industry.
Billions worth of outstanding commercial debt is lurking around the bend, unlikely to be resolved with the credit markets at a standstill. The lack of capital has also placed development and sales activity in a stranglehold. Plus, space absorption is on the decline in light of ongoing layoffs. The industry, like the overall economy, is in dire straits and awaiting change. In the months leading up to the inauguration, speculation abounds as to whether campaign promises, such as tax hikes and infrastructure investment, would translate into actual policy. It may be too soon to truly tell, but the administration’s actions thus far may offer a glimpse into policy to come.
Kick-starting the stalled credit markets is certainly a chief concern on Capitol Hill, as it is in the business world. Days after being sworn in as Treasury Secretary, Timothy Geithner unveiled the Financial Stability Plan, with the intention of injecting further capital into banks, purchasing troubled assets and thawing consumer and business credit markets.
“Our plan will help restart the flow of credit, clean up and strengthen our banks, and provide critical aid for homeowners and small businesses,” Geithner said in a prepared statement. “As we do each of these things, we will impose new, higher standards for transparency and accountability.”
This program could cost north of $1 trillion to implement and has received mixed reviews from the financial community for its lack of details. But a host of commercial real estate associations are praising the plan, namely for its expansion of the Term Asset-Backed Securities Loan Facility to include CMBS.
Treasury will now use $100 billion to leverage up to $1 trillion of lending from the Federal Reserve. A portion of the money will provide financing to investors to purchase AAA-rated securities that are backed by newly originated commercial real estate mortgages, which includes the refinancing of existing mortgages.
“This means that the hundreds of billions of dollars that need to be re-written now have an exist strategy; banks can extend, modify or restructure those loans,” Real Estate Roundtable president and CEO Jeffrey DeBoer says. “When they are restructured they can then sell the bulk of the loans to an investor at attractive financing rates. It will spur demand.”
Another notable feature of the plan is the public-private investment fund. The endeavor will use $500 billion in public financing to leverage private capital to clear legacy loans and troubled assets off bank balance sheets. “By providing the financing the private markets cannot now provide, this will help start a market for the real estate-related assets that are at the center of this crisis,” says Geithner. “Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing assets.”
A definitive structure to this program is still forthcoming, which has some in the industry a bit apprehensive. “What does a public-private partnership really mean? And what strings are attached?” questions Philip Blumberg, chairman and CEO of Blumberg Capital Partners. The Coral Gables, FL-based executive is indeed intrigued by the possibility of coupling federal money with one of his own funds to acquire distressed debt or issue new debt. “When you are in business with the government, the questions are: What are the regulations and what are the costs of capital? It’s not a grant; it’s going to have a cost, but none of that is clear yet.”
Indeed, despite the billions injected into some of the nation’s largest banks, lending has yet to resume in any significant capacity. According to a Wall Street Journal analysis, 10 of the 13 beneficiaries of TARP reported a decline in their outstanding loan balances by a total of roughly $46 billion, or 1.4% between the third and fourth quarters.
Many observers suggest that banks have been using the funds to steady their own precarious positions. To be sure, one of the goals of the program was to stabilize financial institutions, but for the intended purpose of having them lend money again.
Banks may be hesitant to dole out paper because of the lack of federal guarantees, says Thomas J. Bisacquino, president of the National Association of Industrial and Office Properties. The Herndon, VA-based executive likens the situation to that of the insurance industry immediately after 9/11, when companies were reluctant to write terrorism insurance because they couldn’t price risk.
As it did then, Bisacquino says, the government needs to step in to create a federal guarantee. Were the government to do so, “there is plenty of capital that’s on the sidelines that would jump back into the market. The money is just looking for some confidence,” he says.
It’s yet to be seen whether the Treasury’s stability plan will restore confidence in the market. But if the reaction of the stock market, which plunged 400 points on the day of the announcement, is any indication, confidence may not be attainable at this point. Blumberg attributes the market’s pessimism to the skeletal description of the plan.
Keywords: banks, Blumberg Capital Partners, Campaign Promises, CMBS, commercial debt, commercial real estate mortgages, Federal Reserve, Financial Stability Plan, Jeffrey DeBoer, Oval Office, Philip Blumberg, Policy, President Obama, Real Estate Roundtable, TARP, tax, Thomas Bisacquino, Timothy Geithner
