Panel: Despite New Government Programs, Significant CRE Problems Must be Addressed

While the federal government has unveiled an array of programs to unfreeze the credit markets, significant issues remain to be addressed in commercial real estate financing, according to a roundtable hosted this morning by the New York Metro CCIM Chapter. The federal government has had to invent new ways to unlock credit markets, as conditions exist today that are unprecedented, according to David Dubrow, partner in the law firm of Arent Fox L.L.P. In the savings & loan crisis of the early 1990s, the government found the remedy was to put troubled savings & loan institutions into receivership and sell troubled assets by way of the Resolution Trust Corporation, the U.S.’s largest banks are so large and multi-national today that a government takeover is unlikely, Dubrow said. Another major difference between then and now is what Dubrow called a massive “shadow banking” system–the CMBS market–that has collapsed. The shutdown in lending by banks, and the evaporation of the CMBS market, has led to the severe difficulty in accessing capital today, Dubrow said. One of the major goals of the TALF program is to re-start the stalled CMBS engine. “There were irresponsible loans made,” Dubrow said, but he also emphasized that despite problems with loan securitization, the government sees it as an essential financing vehicle. There are sound reasons to be concerned about the health of the banking sector, said another panelist, Lawrence Longua, associate professor at the REIT Center of the Schack Institute of Real Estate at New York University. Citing reports that the government is going to require that Bank of America raise $35 billion of additional capital, he notes that the bank has only 11.6 percent of its loans devoted to commercial real estate. However, Regents Bank has 40 percent of its loans on commercial real estate properties, while the figure for BB&T is 37 percent. And with the shutdown of the CMBS market, banks now lack a major mechanism to get commercial real estate loans off their books. The capital freeze-up has meant that many developers and owners are experiencing a reality check. That has occurred in New York City’s multi-family sector, said David Schechtman (pictured), senior director of Eastern Consolidated. Developers thought they could sell condominiums for over $1 million on the Far West Side of Manhattan that were not located anywhere near a grocery store, for instance, Schectman said. Such a seller’s market is far from the case in today’s economy. Dubrow said that many CMBS loans coming up for refinancing will face problems because of the inflexibility of many special servicers. And despite the raft of government programs, that one has not been addressed, he said. “It will be a mess,” he said. But, Longua, said commercial real estate consists of “ten-year cycles with seven-year memories,” adding that it is important to keep perspective in this difficult time. “Once you see a scary movie a second time, the ending is less scary,” Longua said. “We’ll get through this.”