Commercial Real Estate’s Status: $10MM is the New $100M, Part 1

Like most other industries it is clear that Commercial Real Estate is in the midst of an economic downturn the likes of which we have never seen before.  There was a recent Net Lease Conference held by Real Share which focused on analyzing where the market is, how it came to this point, and what path recovery might look like.

In the opening segment, panelists touched on a few key statistics and events.   First and foremost was General Growth Properties recent Chapter 11 bankruptcy filing.  This came about because of their large debt load created by acquisitions such the purchase of Rouse Company for $12.6B in 2004 combined with the recessionary issues of lower consumer spending and ailing retail tenants. 

Shorter term debt matured at the same time as the retraction in the global financial markets.  It was then mentioned that $594 Billion of additional commercial mortgages will mature between 2009 and 2011 and no financing vehicle is currently available to fill the void, leaving the industry with a major liquidity problem.

First, Understanding the Economic Downturn

• America achieved a level of spending that was unsustainable.
• Regarding the national stimulus plan and budget deficit, we are spending at an unsustainable level.
• Interest rates on the National Debt will consume 12-14% of the GDP.The US savings rate from 2006-2008 was negative, however to date it stands at 4% positive.  While a positive savings rate is a good sign, presently it will extend the current retail downturn and weakened sales levels.
• Currently in a “Negative Wealth Effect” scenario where income is down by 10%, and consumer spending down 20%+.
• Retail has been hit the worst.  All “anchor tenants” are in trouble.
• There is right now 21 sq. ft. of retail space for every individual living in the US, while the per person demand is 13 sq. ft.

Second, Other Key Points

• In 2006, the “what is a hot investment” had a response of “everything”.  Right now there is no clear product type to pursue.
• Opinions are very segregated between the Institutional investors and Private markets.
• Recourse lending is here to stay.
• Corporations will be attracted to Sale Leasebacks as an alternative to raising capital, however, many corporations may find that their financials have deteriorated or the necessary capital is non-existent.
• Inflation, with the current spending initiatives led by the government, means it is not a matter of “if” but “how bad” an issue it will become.

The next segment of this article will cover Institutional Investors, Private Martkets, and the New Realities of Debt Financing including realistic financial institution lending criteria for today and the near future.