Op-Ed: Getting in Front of the Liquidity Crisis
Tom Acitelli Oct. 7, 2009, 6:35 p.m.
Toward the end of 2008, the meltdown in the financial and residential mortgage markets led to a credit crisis that froze lending nationwide. Over the course of the past year, analysts have been forecasting another looming credit crisis—this time with the commercial real estate market.
What makes this latest threat to U.S. lending institutions particularly dangerous is that banks of all shapes and sizes are being severely impacted. In fact, the institutions with the highest risk are the local and regional “Main Street banks,” not Wall Street banks. This is largely due to the economic recession, as well as the liberal underwriting standards that became all too typical in the past decade.
The F.D.I.C. recently reported it had 416 banks on its “problem list” at the end of June, which is equivalent to about 5 percent of the nation’s banks. This total is up from 305 at the end of March and 117 at the end of June 2008. These problem banks had a combined $299.8 billion of assets at the end of June 2009, compared with $78.3 billion a year ago. It’s been projected that in the coming months, anywhere from 200 to 1,000 local banks will fail.
Let’s lay out the facts—commercial real estate in the U.S. is valued at approximately $6 trillion, according to the Washington, D.C.,–based Real Estate Roundtable. Over the past decade, the amount of outstanding commercial real estate mortgage debt nearly tripled, growing from about $1.2 trillion to more than $3.1 trillion. During that period, bank lending, plus issuance of commercial-mortgage-backed securities (CMBS) accounted for 83 percent of the growth, and these two sources of commercial mortgage credit combined currently account for three-fourths of total outstanding commercial mortgage debt.
With this historic tightening of commercial real estate credit, along with a nonexistent CMBS market, the real estate industry is facing a liquidity crisis of immense proportions. Because most commercial real estate mortgages have maturities between five and 10 years, the average annual amount of maturing loans beginning in 2009 most likely is somewhere between $300 billion and $600 billion. Between 2010 and 2012, maturing debt in this sector will explode to more than $1.4 trillion.
At present, thousands of small businesses are at risk of bankruptcy because of the credit crisis with the Main Street banks, threatening millions of jobs and further deepening the economic crisis. These small businesses rely on real estate financing as a source of growth capital to fund business operations.
The federal government has already been proactive in addressing the crisis, specifically concerning the inclusion of commercial real estate in the term asset-backed securities loan facility (TALF) legislation and recent changes issued by Treasury to ease tax regulations governing real estate mortgage investment conduits (REMICs). Additionally, the White House; the chairman of the Federal Reserve, Ben Bernanke; and the president of the Federal Reserve Bank of New York, William Dudley, have publicly stated that thawing the commercial real estate credit market is crucial to economic recovery.
There are important additional steps that the federal government, working with the private sector, can take to help restore credit flows, repair investor confidence and strengthen the economy. Immediate action, as prescribed by the Real Estate Roundtable, must be taken to:
• Extend TALF beyond its current June 30, 2010, sunset date, through the end of 2010 and ensure that the program is accessible to investment grade securities beyond solely AAA.
• Establish a federally backed credit facility for originating new commercial real estate loans.
• Encourage non-U.S. debt and equity investment in U.S. real estate by amending or repealing the outdated Foreign Investment in Real Property Tax Act in order to stop double-taxing foreign investors.
• Continue being proactive in implementing policies that will continue the economic recovery and the creation of new jobs.
Of course, as a real estate owner, I should mention that despite our concerns about the liquidity crisis, there are some positive signs on the local level regarding commercial leasing. After a fairly anemic first quarter, there has been considerable pickup over the past few months, with leases being signed and prospective tenants returning to the marketplace. However, there has not been significant sales activity.
We are at a critical juncture wherein government must continue to take the necessary steps to restore liquidity to the credit markets and create an environment conducive for business and investors to invest and deploy capital.
The commercial real estate industry has a historic opportunity to come together now around a common set of proposals and work together with government officials and industry organizations, such as the Real Estate Roundtable and Real Estate Board of New York, to address the liquidity crisis before it has a negative impact on the economic recovery.