Commentary with Torto Wheaton's Southard

THE FEDS’ INVOLVEMENT IN THE FINANCIAL SECTOR…

With final form of the Treasury Department’s proposed $700-billion rescue plan still being hammered out in Congress, it’s not clear what impact it will make on liquidity in general or commercial real estate’s access to credit in particular. As this was written, some of the original provisions of the plan had been omitted and others had been added—but nothing has been finalized. That doesn’t prevent industry members from weighing in on the subject, however, and 59% of you have said the plan is necessary while 41% think it reaches too far. Given the potential for misconceptions about what the plan would mean, CB Richard Ellis’ Torto Wheaton Research division has prepared a special report focusing on its implications for CRE. The report’s author, Jon Southard, principal and director of forecasting at TWR, makes the point that the possibility of short-term pain for CRE in the Treasury’s plan hasn’t received much comment. However, he says that until the plan takes its final form and starts playing out, the most anyone can do is speculate—or in the case of the TWR report, outline possible scenarios rather than make definitive predictions.

“We’re talking speculation here, and our main point in the article is that the devil is in the details. With that said, it starts with your view of what the problem is and what the plan does. On the pro side, you can argue that if the problem is lack of markets being made—i.e. no agreement on prices for mortgages and equity—then the goal of this proposal is certainly the right one: to get the liquidity flowing again. Those against the plan might be speculating that this is a question of bailing out Wall Street by putting money into the problem, which is how it’s often framed. If you read the fine print, that really isn’t the stated goal, although it has been portrayed as such. However, as the article outlined, it could play out that way. But so far, according to the stated goal, the plan is not to spend $700 billion; it’s to use the $700 billion to get the markets moving again.

“There may be potential for pain in commercial real estate, but that would come out in the details after the plan is passed rather in the form the plan itself takes. Let’s say the plan is effective and the markets start flowing again. That doesn’t necessarily mean higher prices for commercial real estate. The flowing of the markets may very well reveal, for instance, that cap rates in New York are too low, and once trades start occurring again, in some cases you would start to see lower prices than what appraised values would indicate. But that’s very much a ‘might happen,’ not a ‘will happen.’ The plan’s stated goal is not to make all prices go up as a first priority; it’s to get liquidity flowing again so prices can be determined.

“I think some of the misconceptions about the plan are understandable, unless you’re really in the middle of the capital markets. If you’re not out there trying to get a loan, then it’s easy to misidentify the problem. This is pretty abstract stuff; if you don’t pay a lot of attention to it, it’s easy to read the headlines and not understand the concept that’s being presented.

“There’s no question that the plan could get the CMBS market going again. Whatever fundamental problems the commercial real estate debt market has, there’s been this pricing that clearly goes way beyond those problems and factors in this panic over the prospect that CMBS holders will default, as Washington Mutual did on Thursday. As we construe it, what the Treasury is trying to do is remove that extra discount on the CMBS prices and focus the pricing more on the real estate itself.”