Governments around the world have done a commendable job stimulating the global economy by pumping $4.6 trillion into financial markets, or 10% of global gross domestic product (GDP), and restoring liquidity to many areas. Commercial real estate remains one of the hardest hit sectors as valuations have fallen 20% to 40% from their peak in most regions.
Vacancies continue to rise, reducing cash flows and further affecting valuations. There's a lag between economic and real estate recovery, so even as green shoots appear in the economy, a real estate recovery is not likely for another 18 to 24 months. While government programs have begun to take effect, more public-private sector collaboration is needed to restore investor confidence and bridge the stalemate between borrowers, lenders, buyers and sellers.
Extraordinary problems, solutions
The health of the commercial real estate market could further weaken an already fragile financial system. If market liquidity fails to return, borrowers will be unable to refinance pending maturities, forcing additional deleveraging, loan extensions and defaults. This will create additional equity losses, loan losses and balance sheet deterioration.
The world's economic and financial problems have prompted more than 50 countries and the European Union to undertake stimulus relief measures. Some countries have also launched programs directly targeting commercial real estate. Germany nationalized one of its largest real estate firms, and Singapore is offering property tax breaks on commercial and industrial property.
The Australian government created the Australian Business Investment Partnership to provide commercial real estate financing to businesses otherwise unable to secure it.
The U.S. has perhaps been most aggressive with the launch of two programs: the Term Asset-Backed Securities Loan Facility (TALF) and the Public-Private Partnership Investment Program (PPIP). TALF, established and managed by the Federal Reserve, successfully boosted liquidity in the asset-backed securities market, and in June included commercial mortgage-backed securities (CMBS) transactions in its scope.
To address the challenge of legacy assets, the U.S. Treasury, along with the Federal Deposit Insurance Corp. and the Federal Reserve, announced PPIP as part of an effort to repair balance sheets across our financial system. The goal is to help banks provide credit to households and businesses and spur recovery.
Under PPIP, Treasury is partnering with private investors such as GE Capital Real Estate, Angelo Gordon, Oaktree, Invesco and Marathon, to buy legacy CMBS.
The private sector is working with the government to tailor these programs. TALF has been extended by three months for legacy bonds and six months for new issues (beyond the original December 2009 deadline), opening the facility to a broader set of issuers by providing ample time to bring a new issue to market.
Industry advocates mobilize
Industry players, including GE Capital Real Estate, are encouraging the government to consider new programs and/or enhancements to existing programs to hasten restoration of liquidity in the commercial real estate markets.
Expanding TALF beyond AAA securities would dramatically reduce the equity gap and provide viable financing options to borrowers. Under this expansion, risks would remain low given that the loans underwritten would still be investment grade and have a substantial equity cushion absorbing first losses.
A public-private origination vehicle to fund newly originated, conservatively underwritten, market-priced loans would further expedite the return of liquidity to commercial property owners. Under this structure, the government would invest preferred equity and provide a loan to the public-private vehicle. A private industry player would serve as an investor and loan originator with a first loss position to assure alignment of interests and mitigate taxpayer risk.
Creating an originations and insurance trust funded by private sector lenders could provide inexpensive financing to borrowers. Originators would pay to the trust insurance premiums to absorb potential loan losses. These loans could be pooled together and securitized with the underlying trust guarantee.
Finally, a government-sponsored warehouse line of credit could also expand origination capacity. Banks and lenders are hesitant to pool loans for securitization due to the volatility and illiquidity in the market. If the government were to offer warehouse lines of credit, lenders would be more inclined to pool loans for securitization. The move would jump start the CMBS market.
Ron Pressman is president and CEO of Norwalk, Conn.-based GE Capital Real Estate, a diversified commercial real estate finance and investment firm, with 1,900 professionals in 31 markets globally.