The Bay Area Real Estate Journal
Experts: Real Commercial Property Carnage Hasn’t Begun
Submitted February 17, 2010, 10:52 PM
Federal efforts helped stabilize the U.S. capital markets during the worst of the recent liquidity crisis, but the government should cease supporting commercial real estate values, and bank regulators, Congress and the Obama administration should let markets clear and prices re-set.
So said commercial property experts Feb. 17at the San Francisco Four Seasons Hotel.
TALF, or the Term Asset-Backed Securities Loan Facility, was initially intended to support securities collateralized by student, auto and credit-card loans when it was announced by the Federal Reserve in late 2008. But it was extended to commercial mortgage-backed securities and succeeded in helping to cut interest-rate spreads on the instruments as much as 6 percentage points, said Patrick C. Sargent, a Dallas attorney who is president of the Commercial Mortgage Securities Association.
But it should not be extended, Sargent said, and the government should allow markets to settle. “Certainly, there is a need for regulation, and I don’t want the government to sit back and do nothing,” he said. “But the last thing the markets want right now is more uncertainty. It’s got to be a concerted regulatory effort, and it has to work together.”
Timothy B. Gallagher, a managing director for Goldman, Sachs & Co in New York, told those gathered that loans for “good deals” are drawing interest and competition from multiple lenders including life insurance companies, banks and mortgage REITs.
But an overleveraged property where value is below the loan balance is not of interest to any one, and “it just needs to trade,” he said. “We are for letting the market heal itself, and when that happens, we will all feel better. There is no government program that can do that.”
“At some point, you have to have capitulation,” added Toby Cobb, managing director and co-head of U.S. Commercial Real Estate for Deutsche Bank Securities Inc.
As to what might precipitate that final price collapse, several possibilities have been discussed at Goldman, Gallagher said. Rising interest rates would be one. Further deep erosion in property fundamentals would be another. “Those are the only two things that I could see that would cause broad-scale capitulation,” he said. Whatever the case, he does not expect the market to recover quickly.
The government also could force capitulation by requiring that the next largest tier of U.S. banks, perhaps 80 institutions in all, to undergo stress tests akin to those applied last year to the country’s largest 19 banks, Cobb said. That process restored confidence in the institutions and allowed them to raise capital. Once the market understands the status of the additional banks, “more capitulation can happen,” he said.
In any event, current property owners in difficult circumstances should not expect their banks to continue to exercise restraint. Guidelines to bank examiners issued late last year shocked the marketplace with their apparent leniency. In one example, they stipulated that lenders could carry incomplete commercial construction projects on their books at collateral values consistent with the rents and income that the finished project should produce, not at current or as-is value. Such treatment of commercial real estate loans during the boom is widely viewed as one cause of the property price bubble.
But leniency is only half the story, Cobb said. The guidelines also contained teeth, which have been less noted in the marketplace. Going forward, regulators are going to be more critical of banks if their treatment of troubled commercial real estate loans is not tough enough. “And it is not necessarily good news for the borrowers in the room,” he said.
Added Dallas attorney and CMBS expert Sargent: “A lot of you are going to be dispossessed of your property.”
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