The last 10 years certainly have been eventful—from the tragic attacks on the Twin Towers at the beginning of the decade, to the meltdown of financial markets and the economy at the tail end of this period. Having celebrated our own 10-year milestone last year, we at The Real Estate Roundtable congratulate GlobeSt.com for its role in keeping the industry and the public well informed about key industry developments.

The exponential growth of the commercial mortgage-backed securities (CMBS) market early in the decade, to a peak of $237 billion in 2007 — and its similarly spectacular plunge to almost zero issuance at decade’s end — ranks, in our view, as the biggest industry-related episode.

This roller coaster of liquidity likely will be the subject of great debate for some time to come. But it’s clear to us that although there were plenty of excessive actions that led to the unsupportable peak—and now the excessively low level of CMBS activity—there is a significant need for an appropriately sized and functioning commercial real estate securitized debt marketplace. It’s also clear to us that all participants, public and private, should work to restore such an appropriately sized CMBS marketplace.

The dramatic expansion of the CMBS market over the past decade was a “game changer” for our industry, expanding both the supply of, and demand for, credit within commercial real estate. Thus, when the subprime mortgage crisis prompted the equivalent of a “run” on the shadow banking system—which had become heavily intertwined with securitization markets—our industry lost its second largest source of debt financing virtually overnight.

Dysfunction in the secondary markets, deepening recession, and rising consumer and business uncertainty also combined to shut down banks as the other major source of commercial real estate debt. All of this was taking place as a tsunami of commercial mortgage debt—totaling more than $1 trillion—was beginning to come due and in need of refinancing.

Although there are nascent signs of life in the CMBS markets—thanks in part to the Fed’s Term Asset-Backed Securities Loan Facility (TALF) last year—and although issuance could reach more than $10 billion by year-end, current secondary market capacity remains well below what is needed to help refinance the loans coming due.

A key aspect of restoring a functioning secondary market involves reducing the massive equity gap that has resulted from steep property devaluation and increased lender demands for equity.

On this issue, one of our top policy goals is enactment of legislation to reform the Foreign Real Property Tax Act of 1980 (FIRPTA), an outdated and discriminatory law that serves as a barrier to foreign investment in U.S. commercial real estate. We have made some positive steps on reform but much work remains ahead, and we expect this issue to continue to be a priority for us in the new Congress.

More broadly, with policymakers facing an array of far-reaching issues in the near term—e.g., implementing this year’s financial overhaul law; addressing the ongoing foreclosure crisis; restoring jobs, economic growth and appropriate levels of liquidity; deciding what to do about the expiring Bush tax cuts—we continue to urge Washington to act with caution, to consider the long-term perspective, and above all, to “do no harm.”

In the tax policy arena, this means avoiding overly generous incentives that encourage overinvestment, artificially inflate prices and lead to excess capacity and, ultimately, price collapse. Sound, long-term-oriented tax policy also means avoiding overly burdensome tax policies that siphon capital out of the market, and quash productivity, growth and job creation. That’s why we actively oppose the “carried interest” tax hike pending in Congress and support a low capital gains tax rate.

In terms of capital and credit policies, we continue to urge policymakers to avoid dramatic swings in public policy. As with whipsawing tax policy, swings in credit policy also lead to excess and imbalance, requiring follow-up corrective action that is painful to many.

Instead, credit policies should focus on fostering long-term balance, transparency, effective risk management and appropriate levels of liquidity. That’s one reason we are heavily involved in the regulatory rule making process of implementing the new financial services reform law (“Dodd-Frank”)—in particular, pending new “skin in the game” regulations.

Of course, the levels of liquidity we witnessed in recent years were partially fueled by lax underwriting, an erosion of due diligence, and an over reliance on credit agency ratings, resulting in excessive leverage throughout the global financial system. Thus, going forward, in addition to stable public policies, the private sector must do more to uphold stronger underwriting standards, maintain better due diligence, and higher loan-to-value (LTV) ratios requiring more upfront equity in transactions.

Although securitization has been much maligned since the financial crisis erupted, particularly as it applies to residential mortgages, we believe that when the dust settles it will be looked at as one of numerous “villains” in the crisis. The problem was not securitization per se, but one of excess—excess throughout the system, by multiple parties and multiple players. And that’s our nomination for the “big” industry event of the past 10 years.

Jeffrey D. DeBoer is president and CEO of the Washington, DC-based Real Estate Roundtable (www.rer.org), a commercial real estate policy organization. He may be contacted at info@rer.org.

Instant Insights /

The Rise and Fall of Liquidity

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