A Second US Downgrade? Possible, But CRE Sees Bigger Woes From Greece

WASHINGTON, DC-The events in Europe are so fast-moving and so serious--namely, with its call for a referendum vote, Greece has thrown into doubt whether the bailout package so painstakingly put together will survive-–that it is easy to forget the US has its own sovereign debt crisis brewing here on this side of the Atlantic.

The deadline for the Congressional super committee to identify $1.2 trillion in deficit savings by Thanksgiving is almost here. If it isn’t successful, then automatic cuts of that amount will be triggered in discretionary fiscal spending. Worse, in some opinions, if that happens, Moody’s Investors Service and/or Fitch Ratings are likely to downgrade the US debt, following Standard & Poor’s lead this summer.

One school of thought says if such a sequence of events does unfold, the commercial real estate industry--indeed, the entire economy--will suffer, perhaps tremendously. One only has to think back to the market turmoil in August to make such a case.

Another school of thought, though, is gaining currency, especially in Congress. And that is another downgrade would be meaningless for a couple of reasons. One, the market has already priced in S&P’s downgrade. Two, investors continue to demonstrate appetite for US risk even, or rather especially, amidst all of this global turmoil.

So compelling has become this argument that a safe bet would be that if the commercial real estate industry were given the choice, it would hold its nose and go for the downgrade over a meltdown in Europe.

“The bigger issue is Europe,” Integra Realty Resources CEO Jeffrey Rogers tells GlobeSt.com. “Additional downgrades will not have much of an impact because the risks brought out by the first major downgrade is already priced into the market. [But] how Europe handles Greece and Spain and Italy is tantamount to what happens here.”

Lawrence Longua, clinical associate professor of Real Estate at the New York University Schack Institute of Real Estate, goes so far as to call the S&P downgrade a non-event for the commercial real estate industry.

“I don’t see how another would make that much of a difference,” he tells GlobeSt.com. “The choices for security-conscious investors will still be just as limited and the US will still be just as attractive.”

Granted there are other AAA-rated credits, he says, pointing to Australia and Canada and Denmark as examples. None of these markets, though, can offer the liquidity that the US can, he says. “The only sovereign debt that an investor can move in and out of with ease is the US Treasury. No one seriously believes we will renege on our bills.”

The other area of concern--how a downgrade would impact the GSEs--is also a non-starter, Seth Weissman, a partner at Jeffer Mangels Butler & Mitchell tells GlobeSt.com. Freddie Mac went to market the week of the S&P downgrade and found robust appetite for the offering, he notes. “The only thing that would hurt a Freddie Mac or Fannie Mae security right now would be a dramatic change in interest rates and the possibility of that happening is close to nil.”

Brooklyn Law School Professor David Reiss, however, is not so sure about the fixed position of interest rates. His suggested scenario—granted a worse case one--is that a second or third downgrade becomes the proverbial straw that breaks the camel’s back and the global investment market really does start to view the United States’ position as weaker, relative to other developed nations.

In that scenario, he tells GlobeSt.com, “US Treasury securities interest rates could rise. This would of course put upward pressure on interest rates for commercial and residential real estate lending as they both are priced at spreads above US Treasury securities.”

Then, he continues, “interest rates for Fannie and Freddie securities may also rise because they are viewed as backed by the US, so their credit rating would be no greater than that of the US--this could lead to even higher rates for multifamily lending.”