Growth in Alternatives Shows Economy Continues to Heal
- Mar 19, 2014
Over the last few days, news outlets have been headlining the government’s intention to eliminate Fannie Mae and Freddie Mac altogether in an aggressive five-year time horizon. The intention is to remove taxpayer risk exposure by government entities that provide guarantees for the securitized secondary markets. Both entities have been in conservatorship since September 2008. The U.S. government has recapitalized the entities with almost $190 billion, which, to date, has returned about $203 billion in dividends. A Federal Mortgage Insurance Corporation, much like the FDIC, is being proposed to replace the current Fannie and Freddie structures.
The commercial real estate industry, which also benefits from those guarantees and higher-leveraged multi-family loans provided by these GSE’s, is concerned whether or not there is enough liquidity in the marketplace to withstand the changes. Given this concern, along with the tapering of federal quantitative easing, institutional players like pension funds and life insurance companies will be looking for ways to satisfy their yield requirements elsewhere such as offering alternative credit for these same transactions. It’s a good time to shift for everyone on the capital stack.
A lot of the activity that occurred in commercial real estate post 2008 to the present, including the lack of an RTC-style fire sale pricing for property, can be credited to the artificial propping up of the economy through quantitative easing. Money remained very cheap and equity players could make deals work. With the Fed buying fewer bonds (it’s still an enormous amount, but decreasing, nonetheless), rates will increase causing investors to sharpen their pencil before making a property purchase or capital improvement to an existing property in the portfolio. The institutional players who have $10 trillion in their arsenal for commercial real estate, will continue to search for higher-end deals which leaves the middle and smaller markets ripe for traditional investors who are looking for opportunities. This is evidenced by the growth in bridge lenders as I mentioned in my December 2013 article in Commercial Property Executive.
Ultimately, the fact that the sky hasn’t fallen with the tapering or the conversation to rid the market of these two GSE’s, indicates the markets are healing and ready to deal with growth.