Commercial Real Estate Check

The CEO of Vornado Realty Trust,Steven Roth,has been analyzing the sector's prospects.After a vicious,very sharp downdraft,Mr.Roth says,we are in the process of seeking a bottom.That will take 3-5 years.There's no doubt that commercial real estate has re-priced lower.Brokers and tenants now feel that we're in a bottom.We want two-year leases;tenants want long term.This is the traditional sign of a bottom.
The last cycle,in the 1990s,lasted 10 years peak-to-peak.From 1988-91,there was a vicious downdraft.We're exactly on track with the historic 90's cycle.That downdraft lasted three years,with re-equitizing and base-building for the next 3-6 years.That's the best time to do acquisitions and load up on capital,which is what Vornado is doing now,Mr.Roth pointed out.
The government's TALF program is going to finance the AAA portion of a real estate loan.By historical standards,that's a fairly low amount.Vornado is in the TALF queue for refinancing.It's a very slow process,Mr.Roth observed.

Commercial Real Estate Needy

Dan Tischman,whose businesses are involved in construction,hospitality and realty,says it's refreshing the government is getting concerned about commercial real estate.The roll-over is going to have to be refinanced,and the capacity just isn't there.The Term Asset-backed securities Loan Facility,or TALF,needs to be extended.The total outstanding is 3.4 trillion dollars,while in a good year there was only about 40 billion available for lending.
Overall,Mr.Tischman observed,it's still a good time to build because of lower costs.Real estate investment trusts are actually doing quite well.Most of the major REITs have done money-raising to meet their obligations.I suspect there was a bubble of values created by an over-eagerness of lending.We're certainly not gonna see the values come back in a year or two or three,Mr.Tischman feels.

Starwood Likes TALF Prospects

Barry Sternlicht,Chairman and CEO of Starwood Capital,says he thinks everyone's pretty optimistic about Commercial Mortgage-Backed Securities,or CMBS,in the TALF program.I think we're closer to the bottom of the residential side,Mr.Sternlicht observed,so now we can focus on the commercial side.The commercial real estate market is gonna lag the economy.Companies are gonna have to be confident before they get back in.This recovery is gonna be longer,deeper and broader than the Resolution Trust Corporation cycle of the 1980s.There still isn't any debt,Mr.Sternlicht noted,though TALF will encourage some lending.
When we buy land,we're doing it unleveraged,Mr.Sternlicht revealed.We're buying debt in property.There's one in Las Vegas we're looking at,and something in Brazil right now.You've got to be patient.The bid-ask spreads are huge,Mr.Sternlicht feels.

A Question of Balance

Federal Reserve Chairman Ben Bernanke,whose four-year term expires in January,appeared before the House Budget Committee last week,assessing the shape of the economy.The Targeted Asset-backed securities Loan Facility,or TALF,has helped open up lending,Mr.Bernanke said,and he is confident that TALF carries minimal risk.As well,the recovery rate for Troubled Asset Relief Program,or TARP,funds should be excellent.We need to restore ourselves to a more balanced fiscal path,however.
Currency and commodity prices are factors in inflation,Mr.Bernanke pointed out,and will be watched carefully.Most indicators point toward stable inflation.There is no sign of a wage/price spiral.Picking a time to remove accommodation,or Federal Reserve actions,is tricky,but monetary accommodations can be unwound,and the decision can be made with political independence.The increase in federal borrowing has been offset by a decrease in private borrowing.
The fear of deflation has receded somewhat,Mr.Bernanke told the House Budget Committee.Retaining the confidence of the financial markets requires that we as Americans take action now to try and restore the fiscal balance.Financial institutions and markets do remain under some stress,but those banks required to raise new capital have made substantial progress.
We need to be on a path of spending and tax measures to cut debt,Mr.Bernanke feels.The stimulus program will have an effect on jobs for two to three years.When the time comes,we will need to raise interest rates,as the Fed is strongly committed to price stability.Q2 economic growth could be negative as inventories are worked off,but the Fed will not monetize debt.Businesses remain cautious and continue to reduce the work force,as the unemployment report on Friday indicated.Overall,Mr.Bernanke,wearing a gray suit,white shirt and red tie with a gold pattern,was sounding a note of cautious optimism,cognizant of the threat of deficit spending to the economy in the long term.

How Things Have Changed

Concern about systemic risk has started to diminish,Mr.Geithner told the Senate Banking Committee,and there are signs that credit conditions have improved,but we still have a long way to go.The economy is still shrinking;the system is still damaged.We're gonna do no more than what it takes to fix the system.Leverage has declined;banks are funding themselves more conservatively.The vast majority of banks have more than enough to be well-capitalized.Restoring lending in the commercial real estate market is critical.Treasury will pick fund managers for the Public-Private Investment Partnership,or PPIP,in the next several weeks.Treasury still has 123.7 billion in Troubled Asset Recovery Program,or TARP, funds available.

Geithner Briefs Senate Panel

Treasury Secretary Tim Geithner has been briefing the Senate Banking Committee on the current situation.We are looking at ways to get more capital into community banks,he said.Unless we are prepared to contemplate the risk to the system of default by AIG,we have no choice but to fund it.I believe what Congress did at that point was absolutely essential.The bleeding has slowed substantially from the height of the financial crisis.It will take longer than a year for the government to exit AIG.
Demand for credit is falling as businesses repair their balance sheets,Mr.Geithner observed.The expansion of the Targeted Asset-backed securities Loan Facility,or TALF,to a wider range of securities will help repair capital markets.The government has unwound about half its risk from AIG financial products.The demand for credit is greater than what looks like the available supply.We have somewhat north of 100 billion of capital to get credit flowing again.We've got a pretty effective series of programs in place,but they're just getting started,and we have to keep at it,Mr.Geithner admitted.