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WILL THE RECENT FED RATE CUT RESTORE LIQUIDITY?

Cutting the short-term interest rate again could put the US back on its feet or just polish the brass on the Titanic. Once again, the weekly poll numbers went up and down, but 44% of our readers think the Federal Reserve should keep cutting the rates. About a third don’t think the cuts will hurt, but 23% think the market may have been KO’d. We spoke about the cuts with Dan Fasulo, managing director of Real Capital Analytics:

“New York’s a very interesting place and it certainly haven’t been impacted the same way other markets around the US have been. It hasn’t been hit as hard by the credit crunch because of the diversity of capital sources that not only buy properties here but also lend money for acquisitions and new developments. We’re just fortunate here in New York to have such a diverse source of capital groups that want to be involved in our commercial real estate. It certainly helps to soften the blow in periods of economic turmoil.

“The smart thing the Fed has done through their series of rate cutes is allowing the existing lenders that are still in the system to hold their rates steady. If the Fed hadn’t cut rates, they would have had to raise the cost of their capital even higher to satisfy the new risk paradigm.

“We are in troubling times right now and it is more difficult than ever to obtain debt financing for a certain percentage of borrowers. The debt is more expensive. You need to put in more of your own equity to make a deal take place.

“This tremendous source of liquidity in the CMBS marketplace disappeared overnight. In 2007 the CMBS market was providing about 30% of the overall capital for the commercial real estate markets. That 30% no longer exists. In any type of market if you lose a third of the capital overnight it’s going to have an impact.

“Over the past six months, every major lender has taken a deep look at their risk profile and basically begun questioning their portfolio. Were they getting adequate returns for the risk they were taking? I think that if their costs of getting this money hadn’t decreased, it would be that much more expensive for borrowers and would have had a much deeper impact on the overall marketplace if the Fed hadn’t taken these actions.

“With all the turmoil in the debt market, it’s actually created opportunity for many lenders that have been shut out of the marketplace for the last couple of years. Whenever there is trouble it definitely creates opportunity for other groups.

“I don’t think the Fed’s actions are going to trigger any type of longstanding inflation. If the decision was given to me, it would be more important for me to deal with the economic downturn risks to the economy as opposed to the risks on the inflation side. I think the Fed is doing what they’ve got to do. Hopefully we can get the economy back in shape. Inflation is not necessarily a bad thing in terms of commercial real estate. It’s almost a safe haven. That could just drive additional capital to our property sector and could create additional demand for real estate. Only time will tell if the Fed’s decisions are the right moves.

“If there is a more prolonged recession, it’s going to have a softer impact on commercial real estate because of the diversity of the tenant base. It would take a global economic slowdown to have a significant impact on the commercial real estate market in Manhattan due to the diversity of the tenants and the demand from overseas travelers.

“What keeps me bullish on the commercial real estate side is that we don’t have the overbuilding in commercial real estate that we’ve seen in the past.

“Since I’m younger and more bullish, I predict that we’ll definitely be back in a period that resembles normalcy in about 12 months. Unfortunately, what is going on in the debt markets is much more complex than we originally thought. It’s just going to take a longer time to work itself out. I think we certainly can get back to normal about this time next year. The wild card, as always, is whether there will be too much government intervention that prolongs the problem. I hope smarter minds prevail and the government lets the market work out its troubles.”

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