Capital Insights with Jack Kern: TARP to Commercial Real Estate Owners?


Once I built a tower, up to the sun, brick, and rivet, and lime; Once I built a tower, now it's done. Brother, can you spare a dime?(c) "Brother, Can You Spare a Dime," lyrics by Yip Harburg, music by Jay Gorney (1931)

With over $500 billion in commercial real estate loans coming up for renegotiation in the next 3 years, according to some estimates and approximately one third of that in 2009, a number of real estate groups have asked Treasury Secretary Paulson to include commercial real estate as a permissible sector under TARP. With the greatest risks apparently being in office, retail and hospitality, there is a concern that inadequate liquidity will force properties into foreclosure or bankruptcy, adding a needless burden to an already overtaxed economy.

Let's take Miami, downtown Washington, DC, Dallas, TX and Seattle, WA as examples. On a recent evaluation, it seems that all of these places are suffering office vacancies to some degree and their retail properties have more vacancies than what you'd hope for, if you underwrote the deals using typical industry standards. Most of the properties on the fringe of being in trouble of generally well located assets, in reasonable condition, but in markets where genuine softness in their regional economies is taking a toll. The question is, — is TARP the answer?

I have a real issue with funds being used for the automakers unless and until certain conditions are put into place, especially ones that caused them to become non-competitive with other world class manufacturers. In the case of commercial real estate developers and owners, I have no such reservations. In fact, I completely support the idea that if banks and Fannie/Freddie cannot make liquidity available at a reasonable rate, then TARP should be available to help maintain the commercial real estate industry. This industry has no history of the kinds of arrogant and excessive behaviors that doomed the automakers. That TARP has failed to stabilize credit markets so far is undeniable, but to permit one more sector of the economy to fail would be a true loss for a key component of employment and an engine for future economic growth.

It may turn out to be good, that new starts in commercial properties are way off of their historic patterns, because as the economy rebounds, existing properties will be the beneficiary of job growth and demand patterns will return to positive. Covering commercial real estate with TARP is just the beginning of that process, and represents an opportunity for Paulson and Bernanke to finally get something right.

Jack Kern is the managing director of Kern Investment Research and is preparing to enjoy new year's and the upcoming presidential inauguration by renting out his house for $250,000/week and then running off to the islands to escape the January chill. He can reached at 301-601-1900. Happy Holidays and may 2009 bring you and your family peace, love,  happiness and a winning lottery ticket.