A Little Break Always Helps
- Nov 07, 2012
Although it has cost billions of dollars and precious lives, Hurricane Sandy provided a mental reprieve that turned down the noise of the presidential election and Wall Street. Candidates had to cancel events and Wall Street got a day off. It likely helped voters to sober up a little bit, vote with their feet, and get past the election to focus on the more important issues like helping those who will be in need in the East Coast and those who continue on their journey to find meaningful work that pays a living wage.
With the year quickly coming to an end, the commercial real estate debt market will pass a major milestone. The amount of debt maturing next year will be $100 billion less than 2012 and will mostly continue to decrease through 2017 where we will then experience a precipitous drop in debt outstanding. Debt numbers remain enormous ($362 billion in 2012), but it is a sign, nonetheless, that the eye of the storm, like Sandy, may finally be passing us and the clean-up can truly begin to have an effect on the market. The proof is already beginning to show up in the numbers.
Construction projects are slowly increasing in number. The number of permits has tripled and the value of construction has almost doubled since April 2012 in Los Angeles County, for example. Lenders are clearly talking about construction as a product offering. Non-recourse loans are available through traditional banks instead of exclusively with life insurance or Fannie/Freddie. The most recent Charles Dunn Company Market Research Report indicates that cap rate compression is approximately 22 percent, from the third quarter of 2011 to the third quarter today, for basic food group products like office and retail, with industrial remaining stable in terms of value. The signs are encouraging and lenders are saying the lost values are behind them now.
This market still isn’t for the weak. With two trillion dollars floating around in the banking system from Quantitative Easing efforts, banks have only lent about $400 million, a paltry number. It should have generated about $15 trillion in additional liquidity in the marketplace, according to economist Dr. Peter Linneman. As I mentioned in my article last month, QE3 will help rates stay low. We just need to make sure there is advocacy for restructuring to create the necessary job growth to get out of this mess. Our next stop will be ensuring the “fiscal cliff” rhetoric stops and the government deals with bipartisanship issues since the deficit will shrink to less than 1 percent of the economy by 2018 anyway. This will help create additional certainty in the market for lenders and investors alike to move forward with confidence and eventually create sorely needed jobs.