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A Wish List for Commercial Real Estate
By AMY CORTESE
BEFORE Christmas this year, as the government scrambled to fix a recalcitrant economy, some businesses received early holiday gifts. There was $100 billion for the American International Group, the insurance giant; $250 billion for banks; and at least $13 billion for automakers.
President-elect Barack Obama has also signaled that he would spend more than $700 billion on infrastructure projects to help create jobs, while the Treasury Department has an additional $350 billion available from the rescue funds authorized by Congress in September.
Across corporate America, executives are drawing up their wish lists, and the commercial real estate industry is no exception.
Commercial real estate groups have been meeting with members of Congress, the Federal Reserve, the Treasury, the Federal Deposit Insurance Corporation as well as Mr. Obama’s transition team, to press their case. And they say they have a compelling one. Commercial real estate is a significant industry, accounting for $549 billion in construction-related spending and nearly five million full-time jobs in 2007, according to the National Association of Industrial and Office Properties. It also contributes to state and local coffers.
Although commercial real estate remains in better shaper than some other industries — there is a good balance between supply and demand, vacancy rates are modest and loan default rates have so far hovered at a rock-bottom 1 percent, according to trade groups — industry leaders warn that the sector faces significant problems. In particular, tighter credit policies are making it harder for real estate companies to refinance. An estimated $400 billion in loans are expected to come due in 2009 alone, and more than $1 trillion over the next three years, according to industry estimates based on Federal Reserve data.
“We have profound risk on our hands at the moment,” said Bruce Mosler, the president and chief executive of Cushman & Wakefield, a commercial brokerage firm.
Jeffrey DeBoer, the president and chief executive of the Real Estate Roundtable, an industry group based in Washington, agreed. “Commercial real estate debt will be the next major problem that policy makers need to address,” he said.
The commercial real estate industry relies on a steady stream of relatively short-term financing; loans are refinanced every several years or so. With the two main sources of commercial funding — bank lending and commercial mortgage-backed securities — effectively shut down, hundreds of billions of dollars worth of loans are in jeopardy of defaulting.
The bulk of the loans coming due, industry executives say, were originated two or more years ago to help finance a rash of deals in office towers, hotels and industrial buildings, many of which are generating healthy cash flow today. “We’re talking about performing loans — that’s the rub,” said Thomas J. Bisacquino, the president of the National Association of Industrial and Office Properties.
Of course, there were also speculative, highly leveraged deals at the height of the economic bubble, when rents and property values looked as if they would rise indefinitely. As vacancy rates climb and values drop, many of these loans will need to be restructured.
Existing properties are only half the problem. New development has also ground almost to a halt because of a lack of financing.
Getting investment flowing again is the most immediate concern, industry executives say, and they have a number of suggestions. The Real Estate Roundtable, for example, has circulated a five-point plan to both the current and incoming administrations that proposes a mix of lending programs and tax and accounting changes to stimulate commercial real estate investment.
Both the Roundtable and the National Association of Industrial Office Properties want the Term Asset-Backed Securities Loan Facility program, which was initially intended to intended to lubricate the market for securities backed by consumer and small-business loans, to be extended to cover commercial real estate mortgages. When it was announced in late November, Treasury officials said they would spend up to $200 billion on the program.
Alternatively, the groups have suggested that a program be created for commercial real estate debt, perhaps modeled after enterprises like Freddie Mac. They also favor changing tax rules to make it easier to restructure loans (under current regulations, the parties would incur tax penalties), and eliminating what they say are onerous taxes on foreign real estate investment.
Although it would not be a panacea, extending the $200 billion loan program would be a step in the right direction, industry officials said. “The most important thing is that lenders start lending again,” Mr. DeBoer said.
John B. Hynes III, the president and chief executive of Gale International, a developer based in Boston, knows firsthand about the credit crisis. Gale and its partner, Vornado Realty Trust, recently suspended construction on their planned $700 million redevelopment of their One Franklin project in downtown Boston because of difficulties obtaining credit.
About three-quarters of the 250,000 square feet of retail space has been preleased, half of it to Filene’s, the building’s original tenant, Mr. Hynes said. Also, he said, a buyer was found for a 275-room hotel, and one-quarter of the building’s 500,00 square feet of office space has been leased.
The deal was funded with a healthy 40 percent equity stake, and Gale and Vornado were looking for $400 million in financing. But the developers were able to stitch together only $300 million from five banks. The project would create an estimated 3,000 construction jobs for a period of three years, according to Mr. Hynes.
What irks him, he said, is that while he was trying to drum up funding the government was injecting billions of dollars into banks. “So I’m sitting here in Boston waiting for coins to fall out of the sky, and nothing’s happening,” Mr. Hynes said. “I thought they were getting the money so that they could lend it out and we could create jobs. It’s like giving the automakers $25 billion, and then they don’t make any cars.”
Real estate executives say Treasury officials the transition team to a new Obama administration have been listening. “There’s an openness to serious consideration of all of these things,” said Steven A. Wechsler, the president and chief executive of the National Association of Real Estate Investment Trusts.
The Obama team will have a lot on its plate, but executives were hopeful that measures will be taken early next year.
In the meantime, Mr. Hynes and his team have redesigned their One Franklin building, shaving off almost $200 million in costs. They expect to go to the capital markets to try again in January. |
