Coming to the Rescue (5/7)
May 7, 2009 5:14 PM
Will the government’s bailout of the financial sector and Obama’s ambitious budget help retail real estate?
Bringing consumers back to life
As for consumer spending, many economists express little expectation that a combination of tax cuts and infrastructure investment will have much of an effect in the short term. "It will take some time to work its way through the system," says Chandan. "We're not even at the stage where projects have been chosen." There's also the matter of excess production capacity, running at a shortfall of more than $1 trillion in annual sales and other transactions, according to Robert J. Gordon, an economist at Northwestern University.
During the 1981–1982 recession, the only time since the Great Depression when the country experienced a similar loss of output, the economy didn't regain lost production capacity for seven years.
And some economists question the size of the stimulus package, calling it too small. The $787 billion is to be spread over a period of two years, not enough to come close to making up for the shortfall in output and consumer spending. As for Obama's proposed $3.6 trillion budget, size isn't the problem. Instead, there are major concerns about how to fund it and the ambitious focuses on alternative energy, health care and education reform.
One result, could be a continued high unemployment rate into 2011 and well past the time that the recession is declared to be officially over. Some economists are predicting a re-run of the "jobless recovery" similar to that of the 2000–2001 recession. In that recession, it took four years just for labor markets to return to prior peaks, let alone for there to be job expansion.
In addition consumers, spooked by the jobless rate, don't seem eager to resume their free-spending ways. Indeed, it's possible they simply never will because they won't be able to get access to the levels of debt available before. "They are most likely to spend more on groceries and the like," says Marks. "I would not expect people to buy a new pair of earrings."
Industry fallout
Without a significant pickup in retail sales on the one hand and lending capacity on the other, there's another looming disaster—the potential for default. A large number of mortgages are coming due, just when vacancy rates are up and ailing banks are unable to provide refinancing. Over the next three years, $594 billion of commercial real estate loans will mature—many written with aggressive terms, according to Foresight Analytics.
That compares to an estimated $419 billion from 2006 to 2008. Already, there has been a significant increase in the number of maturing loans that have been refinanced with one-year extensions. But, without a revival of CMBS, the capacity to refinance will be severely diminished. While some maturing loans may qualify for refinancing, according to Anderson, others—especially those from 2006 and 2007—won't. The result: an increase in maturity defaults on loans with insufficient capital available to replace the maturing amount.
A rebound in values could mitigate the problem. If that doesn't happen, however, "As a lot of loans come up for refinancing, and properties are not earning as much because of rising vacancies and falling rents, delinquencies will reach a level we haven't seen since the early '90s," says Victor Calanog, director of research at commercial real estate research firm Reis Inc.
For developers, there's almost no place to hide. Most are "blocking and tackling," says Anthony Buono, executive managing director of CB Richard Ellis—cutting costs, renegotiating tenant contracts and so on. But they're taking other steps, as well. For example, Buono also sees an increased use of "cost segregation," an asset depreciation technique that increases cash flow by separating personal property, land improvements, building components and land.
Perhaps the most promising alternative is to expand further into other related areas. Urban Retail, for example, forged an alliance with Streetmac, a Northbrook, Ill.–based commercial real estate financing firm, which will provide advice about acquiring and managing distressed retail mall properties. Similarly, Cosa Mesa, Calif.–based Donahue Schriber recently moved most of its development staff to work in leasing. "We'd rather have our managers make sure they're collecting the rent and adding tenants," says Patrick Donahue, president and CEO. "You need to be in front of your tenants more."
Ultimately, without these government initiatives—both the PPIP and the stimulus package—the outcome most likely would be considerably more severe. Whether they're the right moves, however, is less clear. "We're in the midst of a significant experiment." Just when Glickman will feel ready to indulge in a new suit is anybody's guess.
PPIP Basics
The Treasury Department's plan, the Public-Private Investment Partnership (PPIP), which was unveiled in March, is meant to "draw new private capital into the market by providing government equity co-investment and attractive public financing," according to Treasury material. Comprised of two initiatives, the Legacy Loan Program (p. 42) and the Legacy Securities Program (p. 46). Private investors will only have to come up with about 8.3 percent of the cash, with the government funding the balance of purchases.
Legacy Loan Program
It's designed to encourage the sale of "legacy assets" (what used to be known as "toxic assets") now held by banks to skittish private investors. That feat is to be accomplished through investment by private parties and the Treasury, with debt guarantees provided by the FDIC at a debt-to-equity ratio of up to 6:1. The FDIC also will be responsible for auctioning off loan pools selected by banks. The Treasury will fund half of the necessary equity investment; the bidder provides the other 50 percent. The private investor then must manage the asset, while the Treasury must manage its Legacy Securities Program.
Legacy Securities Program
This is aimed at improving the liquidity of existing securities. It has two parts. First is an expansion of the Term Asset-Backed Securities Loan Facility (TALF). Originally introduced in November, TALF covered new auto, credit card, small business and student loans. In February, that was expanded to include CMBS. (So far, none of the monthly rounds have included CMBS, however). Now, the latest plan takes that one step further by including legacy non-agency RMBS and AAA-rated CMBS. The Federal Reserve will extend loans to purchase these assets.
The second part is the creation of five funds, in which Treasury will match private-sector equity investments. To finance debt, Treasury can provide senior debt financing of 50% to 100% of total equity. The securitized assets must have been issued before 2009 and AAA-rated by at least two of the major ratings agencies. Not just anyone can run these funds. They must have a demonstrated capacity to raise at least $500 million of private capital and a minimum of $10 billion of eligible assets under management, among other things. That part bothers Lisa Pendergast, managing director.
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