Coming to the Rescue (5/7)
May 7, 2009 5:14 PM
Will the government’s bailout of the financial sector and Obama’s ambitious budget help retail real estate?
In recent months, the U.S. government has intervened in the economy on an unprecedented scale. Recent Bloomberg calculations put the total value of all the loans or commitments at an astounding $12.8 trillion. Of that, about $4.2 trillion has actually been spent. Within that total, specific pieces of the intervention are of particular interest to the retail real estate sector. The $787 billion economic stimulus package of tax cuts and infrastructure spending hopefully will provide at least a little boost to moribund consumer spending. More recently, the Treasury Department and the Federal Reserve Bank have warmed to the notion that commercial real estate financing requires a helping hand. Late last year, $900 billion Term Asset-Backed Securities Loan Facility (TALF) was expanded to include commercial mortgage-backed securities (CMBS). And in March, the Treasury Department unveiled a $1 trillion plan to help clean up banks' balance sheets and boost lending, including a program for increasing the sale of some existing CMBS.
The question: Are these measures enough to help revitalize the retail real estate sector? The programs could affect two important areas. The stimulus package and President Obama's proposed $3.6 trillion budget could stimulate consumer spending. Meanwhile, an alphabet soup of programs emanating from the Federal Reserve Bank and the Treasury Department aimed at the financial system have the potential to bring the dormant CMBS sector back to life.
According to many experts, however, the trillions of dollars being thrown at these problems may not be enough. For example, Ross Glickman, CEO of Chicago-based Urban Retail, isn't planning on buying any new suits in celebration. He feels that neither lending nor consumer spending are going to pick up significantly for at least another two years. And it could be five to ten years before the retail real estate industry as a whole fully recovers. "I'm a lot more conservative now, just like everyone else," Glickman says.
Glickman is hardly alone in his queasiness. With national unemployment at 8.5 percent, a fourth-quarter annualized GDP decline of 6.3 percent, tight credit and a moribund CMBS market, few industry experts predict that the federal government's recent moves will have much of a near-term effect. While the government's stimulus package may help boost the economy and slow the pace of job losses, it's likely to make the situation less bad rather than better.
They add that, while the Treasury's recently announced Public-Private Investment Partnership (PPIP) could be an important step in stabilizing the CMBS market, the progress will be slow and modest. For the industry, it means that retail sales will remain low and vacancy rates will stay high—perhaps for years—putting further pressure on rents. Property values are off by as much as 35 percent according to some estimates. And, without significantly improved income, many owners will face the prospect of defaults as mortgages originated over the past seven years under very generous terms come due in a greatly altered lending environment.
At the same time, there are a handful of experts who see reason for hope. They feel, for example, that the government's moves to encourage the sale of depressed assets could have positive results. Tightening spreads and significantly improved bank balance sheets will free up credit and boost the ability of companies to expand, they say. "Generally, if you inject leverage into a system starved for capital, it will be beneficial to some extent," says Lisa Pendergast, managing director at Greenwich, Conn.–based RBS Greenwich Capital.
