Regardless of whether the government decides to buy or not buy distressed commercial assets, however, the commercial real estate industry is gearing up to service those troubled loans and properties--which it is going to have to do with or without TARP funds in the mix. "Even if TARP were to buy these assets, regardless of whether it bought debt or hard assets or both, somebody has to service those properties and those loans," observes Conrad Andersen, senior vice president of global client solutions in the Newport Beach, CA office of Grubb & Ellis Co.

Andersen is one of the leaders of a new Grubb & Ellis Co. unit called the Financial Services Asset Management Practice that the Santa Ana, CA-based company has formed to serve financial institutions, special servicers and government agencies with troubled assets. He tells GlobeSt.com that the effect of the government's decision not to apply TARP funds to commercial assets right now is neither positive nor negative but is "neutral" for the commercial real estate industry.

Andersen explains that, hypothetically, "If the government did acquire hard assets from financial institutions, it would help to provide more liquidity in the capital markets, and that could certainly have an impact on commercial real estate markets." However, that's only a hypothetical situation right now because, as Andersen points out, the rate of defaults on CMBS and other commercial loans right now is still not very significant. "At this point, it's more of a trickle," Andersen says.

Right now, a bigger concern than whether the government does or doesn't buy assets is how to get the credit markets functioning again. "Commercial real estate fundamentals have not deteriorated significantly. The primary problem is that there are buyers and sellers but there is no funding for transactions," Andersen explains.

Trends suggest, however, that the default rates on commercial loans are going to increase significantly, primarily in the hospitality, retail and office sectors. That's one reason that Grubb & Ellis and other real estate services companies, as well as law firms and other professionals who serve the industry, have been gearing up to provide services for financial institutions and other clients who are likely to face problems with troubled assets.

The Grubb & Ellis financial services asset management practice, for example, will provide help with workouts, foreclosures, restructurings, asset management and dispositions for clients ranging from owners to small community banks to the largest institutions and servicers. Andersen says that one of the differences between this downturn and the previous one is that this time around, many of the problem assets are off-balance-sheet deals and CMBS loans that are subject to servicing agreements. In years past, he explains, the troubled assets were portfolio loans by banks that "had the unilateral right to work with the borrower in lieu of foreclosure."

This time around, however, a large proportion of the loans will not be portfolio loans but will be CMBS loans subject to special servicer agreements. The job of sorting out those agreements and the assets that are linked to them will fall to commercial real estate services companies and allied firms that provide the array of services required to identify, value and dispose of troubled assets.

Instant Insights /

Industry Tackles Troubles Without TARP

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