WASHINGTON, DC-If Congress wants to head off an even more severe downturn in the commercial real estate industry it must push through a stew of floating proposals that range from expanding current programs, such as TALF, to rejecting so-called anti real estate taxes, said the witnesses who testified before the Joint Economic Committee Thursday morning. Chaired by Congresswoman Carolyn B. Maloney, the aptly entitled, “Commercial Real Estate: Do Rising Defaults Pose Systemic Threat?” heard from James Helsel on behalf of the National Association of Realtors, Jeff DeBoer from the Real Estate Roundtable, Jon D. Greenlee, associate director, Division of Banking Supervision and Regulation from the Federal Reserve, and Richard Parkus, a research analyst working for Deutsche Bank.
Despite the measures the government has put into place over the past ten months, the lending environment for commercial real estate is worsening, Helsel said. He pointed to two NAR member examples:
- A Memphis apartment broker and certified commercial investment specialist who is on his fifth contract for the Park Tower apartments in Memphis–since the previous four have failed due to the lack of available financing; and
- A commercial realtor in Atlanta that specializes in industrial properties.
This credit-worthy and experienced realtor recently bid on an industrial warehouse by the airport at a price that was 80% below replacement cost of the potential income stream. No go, though, from the local lending community.
The problem, of course, is the moribund CMBS market, Parkus testified. “On the whole, I expect that total losses in CMBS will be approximately 9% to 12% of the outstanding CMBS loan universe, or about $65 billion to $90 billion,” he said. “For the 2005-2007 vintage loans, my estimate of total losses is somewhat higher, about 12% to 15%.”
The Fed has been urging lenders to pick up the slack, Greenlee said. “As part of our effort to help stimulate appropriate bank lending, the Federal Reserve and the other federal banking agencies issued regulatory guidance in November 2008 to encourage banks to meet the needs of a creditworthy borrower…More generally, we have directed our examiners to be mindful of the pro-cyclical effects of excessive credit tightening.” Bottom line, DeBoer and Helsel said, more needs to be done in Washington to pry open credit and lending markets.
DeBoer, who kicked off his testimony with the statement that “I am here today to sound the alarm bell,” suggested a policy prescription consisting of extending TALF beyond its current December 31, 2009 sunset date, through the end of 2010; establishing a federally-backed credit facility, possibly created from the PPIP structure or a privately funded guarantee program, for originating new commercial real estate loans; encouraging foreign capital investment in US real estate by amending or repealing the Foreign Investment in Real Property Tax Act; encouraging banks and loan servicers to extend performing loans, based on cash flow analysis; and, temporarily amending real estate mortgage investment conduit regulations to facilitate early review and possible modification to the terms of commercial mortgage loans that have been securitized in CMBS.
Also, he said, it was paramount to reject new taxes such as the carried interest proposal.