End of the year musings


It’s very difficult to refrain from taking action to stem the spiralling economic crisis, but in reality there is little that has been done so far that will aid a near-term recovery, and less that can be done to prevent the continuing difficulty we will experience in 2009.  The billions of dollars funnelled through TARP to GM, Citibank, GMAC, and AIG will merely result in book-entries in their Chapter 11 papers, and saddle ours and future generations of taxpayers with overwhelming odds.  We have learned all too painfully that each element  of our economy is intertwined, and devastation in one area generally sifts into other areas as well.  Nevertheless, as much as the markets have gleaned about our economic decline, and built such factors into the pricing of equities, there is much that we do not know, and Madoff-like mushroom clouds are inevitable.  It shouldn’t be a surprise, however, that the commercial real estate market is now navigating very treacherous waters.  From projects in development that are being funded by construction loans to completed projects that are not yet stabilized, to established commercial properties, there are various issues that all point to major pressure on the very survival of the current ownership of such properties, and the various instrumentalities that support the industry.  2009 should see a wave of commercial developments that experience a default prior to completion; completed projects that are unable to secure the necessary permanent financing to retire their construction financing; and long-standing properties that experience tenant vacancies, value declines, and an inability to roll-over their debt as required by their current loan covenants.  There are many additional ways in which current commercial loans will be “under-water”, but suffice it to say that lenders and investors will be experiencing a flood of properties returned to them that they have no means, desire or ability to manage.  Furthermore, although these properties may be available at reasonable prices, the ability to finance such purchases with debt has become, and will continue to be very restrictive.  Once again, I am making the call that this is not necessarily bad, and that there are opportunities in this marketplace.  Specifically, because of this credit tightening, clients have been asking me to structure funds or pools of money into entities that comply with the private offering exemptions to the 1933 Securities Act in order to source the equity needed to acquire these “distressed assets”.  These syndicated entities will create a powerful force and result in tremendous opportunity, and should, and will be recognized by federal and state budgets as a driving force to re-establishing the marketplace and inserting the necessary regulatory checks and balances while transferring properties into the hands of value-minded operators as opposed to cash-flow and cash-out operators.  To pull off these kinds of deals requires a melding of disciplines, whether it be realtors or salespeople, portfolio analysts and reverse engineering specialists, securities and other transactional lawyers, commercial real estate managers, asset managers, valuation experts, structured finance and/or development finance consultants.  In this respect, the market collapse can be seen as a necessary cleansing, and the expansion of syndicated asset pools targeting the distressed asset industry a rising and re-building of the industry using a clear view of the past to guide our leverage ratios, valuation principles, and underwriting requirements.  Accordingly, 2009 may be as interesting and opportunistic as it will be difficult.

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One response to “End of the year musings

  1. Warren:

    Your comments and ideas are interesting. Liquidity is certainly choked at all levels of the commercial real estate sector. This morning I attended a conference and heard Todd Sammann of Colony Capital (former head of CMBS at Deutsche Bank) prescribe some “medicine” for the sector. He believes that whatever comes forth from Treasury must be “consistent” and believable. He believes that TARP needs effective oversight and clear guidelines for reinvestment of capital. He says that TALF could be a vehicle for “flowing” capital through in the commercial sector. He believes another “RTC” structure that enables a “good bank/bad bank” structure that segregates new lending from the problem loans with some structure to reprice the underlying securities and adjust property values accordingly. He also believes the rating agencies need to be revamped with more tightly regulated guidelines for rating securities.

    These ideas are easy to state, but much harder to implement. The scary thing is that this would only address commercial real estate and not the rest of the financial industry. These measures would take an entire agency to implement and regulate, it seems.

    We all need to re-adjust our thinking for perhaps several years ahead. It will be a long road to stability.

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