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VIDEOWill the Commercial Real Estate Coffin Be Sealed?
By
Fil Zucchi
Jan 21, 2010 1:00 pm
Yes -- if anything close to the financial proposals Obama announced were to pass.
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While it's understandable that the Obama administration needs to find a diversion from the collapse of health-care reform, if anything remotely close to the financial proposals he just announced were to pass, you can seal the coffin of commercial real estate and start lowering it into the grave.
Since the repeal of Glass-Steagall, most institutional-sized deals comprised a sponsor (a public or private REIT which would put up nominal equity and collect huge fees), and a financial backer that would put up the rest of the equity from one pocket, and the financing from the other pocket.
That was no small reason why risk spreads on commercial mortgages completely collapsed. Remove the money partner from the equation and there goes a huge portion of the equity and mezzanine capital pool.
Worse, if the loan underwriting must then be done on the financial strength of the arms-length equity partners, loan spreads are likely to balloon out such that few existing loans will be serviceable. (Just go to you regional bank right now and ask them what the rate would be for a CRE loan and what kind of debt-to-equity ratio they'd require to fund it). This, of course, is happening just when a few thousands of billions of dollars of CRE loans (already underwater) are coming up for refi.
I'm not suggesting the concept of keeping commercial banks out of speculative CRE investments is necessarily bad, as long as everyone is on the same page as to what the consequences will be.
That said, in my opinion, the odds of Congress passing anything remotely close to today's headline are slim and none and slim is dead, but the uncertainty may be enough of a catalyst for REITs investors to recognize that there's not much there.I remain very short the DJ iShares Real Estate (IYR) via various option positions.
Position in IYR.
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