What Will It Take For Lenders To Lend Again?

As everyone knows, the commercial real estate capital markets have been in turmoil since June of 2007, when the single family sub-prime lending debacle first appeared on the scene.

Since that time, the lending market has slowly but - ever so consistently - continued to deteriorate. There are fewer lenders lending today than at any other time during this credit crisis and those who are lending are using more conservative criteria for underwriting their loans and qualifying their borrowers.

One question I am frequently asked as a commercial mortgage broker is, “What will it take to get lenders to start lending again?” There is no silver bullet – no one solution that will resolve this lending crisis.

In order to get commercial real estate lending back to some semblance of normality several things need to happen, listed below are seven:

1. The overall economy needs to improve. Sorry to state the obvious but it needs to be said. The good news is that the economy, fueled by government stimulus, grew last quarter for the first time in more than a year.
   
   Over the last 3 months, GDP grew 3.5%. But the problem is that the recovery so far has been a jobless recovery. In fact, employment growth is still contracting just at a slower rate of loss than previous months.
   
   In order for commercial real estate to benefit from this recovery employment must begin to grow and consumers need to have the confidence to increase spending.
   

2. Commercial real estate fundamentals need to stabilize. Employment growth and improvement in consumer spending will result in an increase in demand for office, retail and industrial space.
   
   Occupancy rates will stabilize causing rents to firm up and with increased net rental income, default rates on loans will slowly lessen.
   

3. Foreclosures need to occur so banks can cleanse their balance sheets of non-performing assets. One of the important lessons that we learned from the S & L crisis of 20 years ago is to address the problem head on.
   
   Yes, it was painful but bad real estate deals that were taken over by the Resolution Trust Corporation became exciting opportunities for those risk takers that purchased these assets at substantially discounted values.
   

4. Weaker banks need to fail. There are about 8,000 banks in the United States. During the past year about 120 banks have failed with another 400 to 500 banks expected to follow.
   
   If we want to avoid a 10 year recession similar to what Japan experienced during the 1990s we must allow the weaker banks to fail.
   
   We don’t want to follow the example of the Japanese bank regulators who allowed insolvent banks to survive which only prolonged their country’s painful recession.
   

5. Lenders need to extend, amend and pretend. Performing loans, with borrowers who have never been late on a payment, need to be extended when their loans are due regardless of how the loans underwrite in today’s lending environment. Those loans that are marginally performing but are basically sound real estate may need their loan terms amended.
   
   Maybe a lower interest rate, a longer amortization, or a reduction in the loan principal should be implemented, whatever it takes so that the bank doesn’t have to foreclose.
   
   Not foreclosing would be in both the lender’s and borrower’s best interest. Lender’s need to have the wisdom to “kick the can down the road” in hopes that as the economy and real estate fundamentals improve that the future lending environment will also improve making it easier to finance real estate in the future than in today’s lending climate.
   

6. Inflation needs to happen. Experts are predicting, and I fully agree, that inflation is inevitable. It’s not a matter of if it will happen, it is only a matter of when and how much.
   
   Those who lock in long term fixed rate loans are going to look incredibly intelligent in a couple of years as interest rates begin to climb along with the cost of a loaf of bread and every other consumer product.
   
   That being said, inflation is the friend of the owner of commercial real estate. As values are slowly pushed up due to inflation the trauma of the present situation will slowly subside.
   

7. A new version of the CMBS product needs to be created. Without the CMBS market there is an estimated $400 to $500 billion shortfall in the supply of capital to finance all the real estate loans coming due over the next three years. There is no lending source – not banks, or life companies or GSEs – on the horizon to absorb this huge loan volume.
   
   What needs to take place is a new and improved version of the CMBS product. Experts suggest four regulatory changes in order to re-establish confidence in this once thriving market:
   

• Reform of the rating agencies which were complicit in the downfall of CMBS.
• Those who securitize mortgage pools should be required to retain a significant portion of the riskiest tranche (a slice of a mortgage pool with similar inherent risk).
• A portion of the profits should be deferred on the securitizations until the loan portfolio is well seasoned.
  
  To make these regulatory changes will require someone in Washington, DC – Congress, the Federal Reserve, the Treasury Department – to take real leadership on a complicated issue, which so far has been sadly lacking.
  

All of these solutions will take time to favorably impact the market. Even if all seven factors were to begin moving in the right direction today, it would take months before the lending environment would fully feel this positive influence.

Unfortunately my crystal ball tells me that 2010 is going to be another ugly year in commercial real estate as the fundamentals to turn this market around are not yet in place.

Hang in there. It’s not over yet.

The Fed Pulls The Rug Out

by Doug Marshall, CCIM
Market Assessment
Published September 30, 2009


And the hits just keep onnnnn comin’!

After having committed earlier this year to a policy of artificial stimulus of the mortgage market, the Fed made the announcement on September 23rd that they were withdrawing – or at least not expanding – direct purchases of mortgages and government debt.

Most “experts” believe this decision to stop buying mortgages and government debt will have a dramatic long-term impact on interest rates.

Shown below are the opinions by knowledgeable sources about this monumental decision that we find most provocative:

· With the amount of money the Federal government has pumped into the economy, almost every economist is predicting the return of hyper-inflation. The Federal Reserve’s only remedy for that will be to raise interest rates which, as we all know, is counter to business development and growth. 1

Surprisingly, I have also seen this premise directly contradicted, including this one by the Fed: “the Committee expects that inflation will remain subdued for some time.”

Another humdinger of a quote regarding the recent Fed decision:

· These purchases helped the Federal government continue its stimulative deficit spending over the cries of budget hawks in Congress, it helped keep a lid on borrowing rates throughout the economy.

Thus, we had a unique situation where stocks were rising without a concurrent and ultimately self-defeating rise in Treasury yields – enjoying a daily slice of chocolate cheesecake without an expansion in the waistline.

Now the equity market must operate in a more normal environment where rising stock prices result in higher interest rates. 2

The Federal Open Market Committee, which made this decision and other decisions affecting monetary policy, seems itself to be at odds as to what inflation is going to do, how much slack is in the economy, and how much intervention is necessary or healthy.

While it’s disappointing to see the Fed’s purchases of mortgages and government debt being discontinued, surely commercial real estate is going to require a return to more realistic – if painful – conditions in order to right itself well.

Perhaps not quickly, but well. PriceWaterhouseCooper, for one, is forecasting that the commercial real estate market will remain in recession until at least 2012. 3

It’s the byword of capitalism: survival of the fittest. And, while the fittest are surviving, look for more vacant storefronts and a shorter lender list, as the lions have their way with the lambs.


Sources:
1 Commercial Real Estate Will Not Benefit From The End Of The Current Recession, by Robert Canter of Gerson Lehman Group, Sept 8 2009
2 Did The Fed Just Kill The Bull Market? by Anthony Mirhaydan of Top Stocks Blog – MSN Money, Sep 23 2009
3 Commercial Real Estate Recession to Keep Going, by SquareFeetBlog.com, Sep 15 2009

The China Effect On The Dollar

by Doug Marshall, CCIM
Market Assessment
Published September 15, 2009


During America’s recent economic swan dive, we must admit that we have issued some dire warnings and predicted some difficult times.

But we’ve also come to the conclusion that we need to focus our attention these days on some key financial indicators instead of rambling all over the place about the bad news.

Right now, we believe, the key financial indicator to watch is the health of the dollar.

The almighty dollar has been for many investors the most important, reliable, and used currency in the world. The question is – what is the dollar’s long-term outlook?

To prognosticate accurately, one must think globally because the dollar really isn’t ours anymore. It belongs, in the purest sense, to whoever has the most of them. Um, that would be China (see chart below).

As we wend our way through the economic morass, America has counted on the ability for China and Japan, among others, to continue buying Treasuries at their typical rate.

Right now, though, that demand has slowed, especially for long-term Treasuries.

This is bad news for Washington. When investors got nervous about the crazed spending, borrowing, and printing of money from the Bush & Obama administrations, they backed off on the purchase of Treasuries, which is how Washington raises cash to fund their agenda.

Now, to make matters worse, China has actually begun selling, in net terms, their massive holdings of Treasuries.

And, according to Mike Larson of MoneyandMarkets.com, “One thing seems clear: that one of Washington’s most dependable sources of loans to finance our out-of-control deficits is drying up.”

Mr. Larson quotes the following figures in coming to this conclusion:
· In 2006, China and Hong Kong accounted for more than 50% of the increase in the amount of Treasury debt sold to the public.
· In 2008, their share had fallen to 22% of newly issued treasuries at the same time that the U.S. government increased its public debt by a record $1.2 trillion.
· In the first half of 2009, China and Hong Kong acquired only 9% of the more than $800 billion worth of Treasury bonds that were sold.
· In June of 2009, China actually reduced its note and bond holdings by $25 billion.

The sour appetite for Treasuries across the board is a concern to the Federal Reserve. Without a robust demand for U.S. Treasuries, treasury rates will have to increase to spark additional interest.

Higher treasury rates mean higher across the board rates for everything from auto loans, home loans, business loans, you name it.

So what would be the upshot of all this? At the least, higher interest rates would be inevitable as a result of China more and more leaving Treasuries where they sit on the table.

And in that process, the hope of vigorous economic recovery gets squashed.

Doggone ripple effect…!


Sources:
China Is Now A Net SELLER Of U.S. Treasury Notes And Bonds!, Mike Larson, moneyandmarkets.com (9/6/09)
U.S. Concerned on Debt Demand, Treasury’s Dollar SaysBloomberg News (9/11/09)

How to Survive the Economic Downturn – Part 3

by Doug Marshall
Published September 10, 2009

Back for an “encore performance” is a 3-part series that I sent out in January. For those of you who missed it the first time, or who want to re-read it again, read below.

Over the last two weeks I have re-sent Parts 1 and 2. Today is the third and final part to this series. Enjoy!


In this series’ first installment, I discussed getting back to basics, staying absolutely focused on the task at hand, and differentiating yourself from your competitors. Click here to read Part 1, if you missed it.

Part 2 continued by discussing how to remain 110% committed to your career, the value of redefining yourself - sometimes a good move in a bad economy, and the importance of keeping a positive attitude. Click here to read Part 2.

This is the final installment to this series…


Deep-Six What Doesn’t Work
Albert Einstein once said “The definition of insanity is doing the same thing over and over again expecting different results”. Years ago I was employed at a company where the fee split was such that I was barely hanging on.

I had worked there for several years and I kept asking myself why I thought that my compensation the next year would be any better than it had been so far?

After months of struggling with this question, I knew that I had to move on. I had to leave my comfort zone and take some calculated risks.

Have you been doing the same thing over and over again expecting different results? Is there some way of marketing yourself that is no longer effective but you’re still doing it anyway? Are you working for a company that does not have the vision to succeed in this economy which will ultimately take you down with them?

A bad economy can sometimes be a blessing in disguise. It can force you to make those decisions that you’ve known in the back of your mind had to be made, though you were unwilling to make them, being comfortable with the status quo.

If you’re like most people in sales these days you are no longer financially comfortable, as sales have dramatically dwindled and profits have disappeared altogether. Like many others, you are beginning to feel the pinch in your wallet. So what changes do you need to make in order to survive?

Don’t Give Up
In his book, Good to Great, Jim Collins refers to the Stockdale Paradox, named after Vice Admiral James Stockdale. Stockdale is one of the most highly decorated officers in the history of the United States Navy.

In 1965, he led aerial attacks from the carrier USS Ticonderoga. His plane was shot down over enemy territory, he was captured, and he spent years in a North Vietnamese prison. While in prison he encouraged his men to retain their absolute faith that they would prevail in the end regardless of their difficulties AND at the same time to confront the most brutal facts of their current reality.

Do the same thing:

· Retain absolute faith that you can and will prevail in the end, regardless of the difficulties you face.
· At the same time confront the most brutal facts of your current reality, whatever they might be.

In his classic book, The Greatest Salesman in the World, Og Mandino spoke eloquently about the importance of persisting through adversity. His book tells the story of Hafid, a poor camel boy who longs to learn the secrets of salesmanship.

One of the ten secret scrolls reveals to him that to succeed in life requires the character quality of perseverance. The scroll states,

“I was not delivered into this world in defeat, nor does failure course through my veins. I am not a sheep waiting to be led to the slaughter. I am a lion and I refuse to talk, to walk, to sleep with the sheep.” When all else fails, that attitude can carry one through many, many difficult times. Don’t give up, no matter what.

This has, of course, been a recounting of my personal journey. I have found that there are no stories or examples that resonate so well as those born of one’s own experience. I am grateful for the chances I’ve had and hope that you can benefit by these ideas and concepts that I’ve garnered over the years. Many are mine… many more are not. But then, we all stand on the shoulders of someone.

In summary, there is an old African proverb that may say it best:

Every morning in Africa, a gazelle wakes up.

It knows it must run faster than the fastest lion or it will be killed.

Every morning a lion wakes up.

It knows it must outrun the slowest gazelle or it will starve to death.

It doesn’t matter whether you are a lion or a gazelle.
When the sun comes up, you better start running.

We need to have the same attitude as the lion and the gazelle – let’s run as hard as we can so as not to become the economy’s next victim. To do so will likely require that we conduct our business differently than times past as doing “business as usual” will not work in today’s faltering economy.

Improve your chances of still being around when the economy rebounds by adopting the business principle that’s been presented that is most appropriate to your specific situation.

I wish you the best in 2009. I am confident that weathering this economic perfect storm will prove us more resilient than we could ever have thought or imagined.

How To Survive The Economic Meltdown - Part 2

Doug Marshall, CCIM
Published September 3, 2009

Back for an “encore performance” is a 3-part series that I sent out in January. For those of you who missed it the first time or those who want to re-read it again, read below. Last week, I re-sent Part 1. Today is the second part to this series. Enjoy!


In my previous installment, I discussed getting back to basics, staying absolutely focused on the task at hand, and differentiating yourself from your competitors. Click here to read Part 1, if you missed it.

Be 110% Committed To Your Career
I had a friend, years ago, when I was first starting out as a commercial mortgage broker. We both were struggling to pay the bills and at that point in our careers we were wondering if we were going to make it or not.

I remember him saying that if this did not work out he had another lucrative opportunity with a newly established dot-com company. He asked me what my plans were if I didn’t succeed at being a commercial mortgage broker. I told him I had no other plans.

My choice was to succeed as a commercial mortgage broker or fail miserably and utterly. There was no other alternative. Because I knew the consequences of failure I eventually succeeded.

It was a difficult struggle and took years to be successful but giving up was not an option for me. On the other hand, my friend was out of the business within a year and the opportunity with the dot-com company never materialized.

The lesson to be learned is this: It is very difficult to succeed in any profession or any endeavor if you are not 100% committed to it. In today’s economy that principle is truer than ever. Some may view having another job waiting in the wings as a prudent safety net should their current job not pan out. In reality, it’s a recipe for failure.

If Necessary, Redefine Yourself
Sometimes after you go through the self-assessment process you realize you’re not the problem, the market is.

No matter how good you may be at differentiating yourself from your competition, there may not be enough remaining market share left to make a living, no matter how good you are at your profession.

If that is true for you, redefine yourself by finding a new market niche within your profession.

Recently, a friend of mine was meeting with someone who is in the residential mortgage market. As you know, this market has been devastated. Employment in this sector of the economy has declined over 80% in the past year or so.

But this person, who is in this profession, is surviving. How so? He has moved away from doing exclusively residential mortgages to focusing on reverse mortgages for seniors, currently a lucrative market.

With every change in the economy there are winners and losers. Find those clients who are in the most financial pain resulting from the poor economy. They are the ones in need of assistance and they are motivated to make changes in their current situations. Then find a market niche that helps those who are in financial distress.

You will be doing them a service while making a living until the market changes again. As Jerry Mason of Westland Apartment Brokers says so aptly, “Follow the pain.”

Stay Positive!
Having a positive attitude, to me, is by far the single most important thing to focus on during difficult times. Here are some suggestions for staying positive when the business is hurting:

Avoid negative people
We all know who they are. Sometimes these negative people are unaware of the harmful impact they have on those around them. Avoid them at all costs and, if you cannot avoid them, tell them you don’t want to hear it.

Quit watching the news
Yes, a lot bad things are happening right now. Each day, some new calamitous event happens that makes our economy that much worse.

But it’s also important to realize that those in the news business are there to make headlines so that they have an audience.

How much of what we hear is overstated or incorrectly stated by the news media in order to create headlines and increase their own market share?

Don’t go it alone
Find someone, or maybe more than one person, with whom you can share your deepest fears, someone who will lift your spirits when things aren’t going well, and someone who can celebrate with you when you succeed.

Solomon once said, “There is a friend that is closer than a brother.” Find that person. Don’t be a Lone Ranger.

End, part two