Those of us who lived through the late 1980s and early 1990s and witnessed the establishment of the Resolution Trust Corp. wonder if the same devaluation of assets by lending institutions in order to satisfy FDIC requirements will once again occur. During that period, the RTC was created to operate and liquidate the assets of hundreds of failed banking institutions, the savings and loans, and the US government through the RTC became probably the largest owner of office buildings and hotels.

Here in New York, we are seeing offerings of primarily mezzanine loans on investment grade properties. The interest reserves that lending institutions had required of purchasers have not as yet engendered a wave of foreclosures and properties being taken back by the lending institutions as REO in their own portfolios, but this may once again occur. Banks may not be as harsh as they were before, but eventually, they will have to protect their bottom lines. The question is whether the FDIC will require the lending institutions to protect their balance sheets by writing down the value of these mortgages.

Residential and office properties have maintained their basic values, with some increases in rental rates for the most part, especially in New York. There has been little vacancy increases especially in apartment buildings subject to rent regulatory guidelines and even with increases in operating expenses, these properties still generate sufficient income. Office properties will probably show an increase in vacancies because of the failures of Lehman Brothers, Bear Stearns and others and the subletting of existing spaces. However, there still has been no major drop in the rental rates in class A office buildings. The sector that will be most affected is the hospitality sector, where capital for new construction has virtually dried up.

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