November 12, 2009
Sam Zell, of Equity Office fame, has come out indicating that the commercial real estate calamity is overblown. He is basing his premise on two things, one the workouts and other programs in place that are keeping a lot of deals from being sold, though one could argue on life support. The other is that in 2011 and 2012, we will have rebounded and economic activity will be sufficient enough to fill vacancies, though he notes at a significant rental discount.
Mr. Zell, the billionaire real estate investor who has been maligned for his bad bet on the Tribune Company, told a roomful of investors this week that fear of defaults in the commercial real estate market has been “greatly exaggerated,” according Crain’s Chicago Business.
With enough private investment and public subsidies, deals can be kept on life support for quite a bit of time, there’s no doubt about that. Perhaps long enough for the market to come back as Sam Zell believes. Remember from the latest Federal Reserve Survey, 70% of banks have indicated that more than 25% of their commercial mortgages have had their maturities extended.
But at what cost does all this come at and what happens once you introduce higher interest rates into the equation? What happens if leasing velocity doesn’t return with a vengeance or job creation is slow. What happens if the stock market falls and if unemployment goes to 13% as some (David Rosenberg for example) are now predicting.
The biggest problem we see is uncertainty, that is, investor confidence. If an investor feels confident that things are coming back, then he or she will make the big bets. If not, they will want the bargain basement price and are unwilling to stretch leaving the market in a state of paralysis.
But the way things are going one thing seems fairly certain, and that is unless banks and the government are willing to make some big sacrifices, somebody, be it the taxpayer (most likely) or banks will be saddled with the debt, which will prove to ultimately be a drag on GDP.
[via NYT DealBook]
- Dan Tishman on CNBC – CRE Second Shoe To Drop
- Sam Zell Discusses Real Estate
- Chairman of AREA (Apollo) William Mack on CNBC
- S&P on Insurers and CRE
- Moody’s: CRE Prices Will Continue To Fall