After Election, Market Slips, CRE Industry Looks Ahead

After a fine optimistic day ahead of the presidential election yesterday, Wall Street wasn’t feeling as peppy today. In fact, the Dow Jones index took a considerable thumping, ending down 486 points, or a shade over 5 percent. The S&P 500 and Nasdaq similarly slid–5.27 percent and 5.53 percent, respectively. An election is one thing, but a bleeding services sector may be on investors’ minds more today: the U.S. private sector lost 157,000 jobs in October, according to ADP payroll data. The government’s numbers, which probably won’t be any better, are due Friday. The nation is now entering what may be the most closely watched presidential transition since FDR replaced Hoover. “[President-elect Obama] may quickly unveil the leaders of his transition team–all of whom have been working anonymously for weeks–and announce his White House chief of staff by week’s end,” predicts the New York Daily News. “A new Treasury Secretary may follow soon thereafter.” Or, so important is the decision, the new Secretary could be named as early as today. Certainly one will be in place for the big powwow of the world’s top 20 economies in Washington D.C. on November 14-15. Word is that Sec. Henry Paulson–who may be rather tired of his job–will start working with the designated person as soon as he knows who it is. “Obama needs a Treasury Secretary who will compel the nation’s largest banks, which already have received billions in equity and loans, to do the same [as J.P. Morgan, which is modifying many of its mortgage loan terms], and to rebuild the securitization market that pipelines funds from insurance companies and pension funds to regional banks, mortgage brokers and finance companies that are too cash-starved to help worthy homebuyers and businesses,” said Peter Morici, professor at the Robert H. Smith School of Business at the University of Maryland, in his weekly bulletin. Much attention will be on the housing market during the transition, but what about commercial real estate? Owners and investors are generally expecting higher capital-gains taxes under the Obama administration and a more strongly Democratic Congress, for one thing–perhaps an increase of (say) five percentage points on people making more than (say) $250,000 a year, which would include a large number of commercial real estate players. In normal times, the prospect of such an increase would spur sellers to sell before the rates increased. But these aren’t normal times, and buyers are hard to find, even as lower valuations mean bargains to be had. Sellers next year, if there be such, may have to take their lumps when it comes to capital-gains taxes. Then again, as owners of commercial real estate, they may have other things to worry about–such as a market too much like the real estate depression of the early ’90s. “The next tsunami to hit will be the commercial real estate market,” Thomas Barrack, the founder of Colony Capital, said in the Wall Street Journal as Americans were voting yesterday. The “tsunami” would be triggered more by the sour economy than anything dodgy about the financing of commercial real estate. Job losses and decreased consumer spending will naturally reduce demand for the likes of office and retail and hospitality space directly, as well as industrial distribution space indirectly. That in turn would sink some existing commercial mortgage-backed securities and collateralized debt obligations, about $3.7 trillion of which are currently outstanding. Barrack posited that as these vehicles mature in 2010 and 2011–not so long from now as its sounds–there will be a “refinancing crisis.” Moreover (as reported in the WSJ “Heard on the Street” column), commercial property losses over the next 10 years may be as much as $250 billion, according to Alan Todd, head of research on CMBS for J.P. Morgan Securities. Sounds like the early ’90s. Or is it? Not everyone thinks the comparison is apt. “Commercial real estate is definitely facing a drop in demand, and that’s already hurting,” Constance Moore, president & CEO of San Francisco-based BRE Properties Inc., a REIT that specializes in the multi-family sector, told CPN. “But unlike the early 1990s, there isn’t an oversupply of commercial space in most markets, which might moderate the real estate downturn somewhat.” A few commercial real estate markets may even come out winners during the Obama years. Specifically, the metro Chicago market might well benefit from an Illinoisan in the White House, and not just in the usual federal largesse ways. For one thing, if the Obama administration makes good on its promises to shore up American manufacturing (supporters will call it “saving jobs,” while opponents will call it “protectionism”), then Chicago as a manufacturing and distribution hub will probably benefit eventually. Then there’s the matter of the 2016 Olympic Games. According to various London oddsmakers, Chicago is already the favorite over Madrid, Tokyo and Rio. The International Olympic Committee will meet in about a year to decide, and, depending on how things go early in President Obama’s term, might have the new American “brand” on their minds, and pick Chicago. Which would mean all kinds of infrastructure work and other real estate projects for the Windy CIty, almost regardless of the state of the economy in the early 2010s. A lot of people in Chicago were happy about the election results last night, and that surely includes Mayor Daley.