Challenges Facing
Commercial Real Estate:
A Five Point Plan to Liquidity
Clifton E. (Chip) Rodgers, Jr.
The Real Estate Roundtable
Washington, DC
www.rer.org
Washington Policymakers Face
Significant Challenges
• Economy
– Credit Crisis, Recession, Jobs, Budget
• Global Security
– War on Terror –Afghanistan, Iraq, Iran
– Rise of Asia – China, India
• Sustainability and the carbon footprint
– Rational energy strategy
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Political Climate Shifting?
•
•
•
•
•
•
POTUS – Approve 51.8; Disapprove 41.4
Generic Congressional – D. 42; R. 38.7
Congress – Approve 26.8; Disapprove 64
Right Direction 39; Wrong Track 53.6
Rs ahead in NJ, VA, NH, AR, DE, PA, NY
Too soon to call
Source: Real Clear Politics - RCP Average 9/12 - 10/1
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Roundtable Agenda
Year of Living Dangerously
Critical Issues
– Restoring Liquidity
– Filling Equity Gap
– FIRPTA, ECI
– Carried Interest
– Sustainability
– Infrastructure
– Card Check
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The Credit Crisis:
Staring into the Abyss
•
•
•
•
•
Real estate faces most challenging credit
market environment in decades
Credit markets remain closed to commercial
real estate creating systemic risks
Lack of liquidity has paralyzed markets
Job losses hurting property fundamentals
Economic carnage continues
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Credit Market Tsunami
• $6.7 trillion U.S. property market faces
worst liquidity challenge since Great
Depression
• Of $3.5 trillion in commercial real estate
debt, average $400 billion loans mature
annually
• Credit markets remain shut down
• Strategies to stop the falling knife
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Commercial Real Estate Debt and Equity
Investment-grade, income-producing real estate
$6.7 trillion as of June 2008
Total Debt
Total Equity
$3.5 trillion
$3.2 trillion
Source: JPMorgan Asset Management
Commercial Real Estate
$3.5 trillion
Debt Outstanding
By source of funds
$1.04 trillion
$1.3 trillion
CMBS
1988-Q4
Banks
1998-Q4
2008-Q4
■
Banks
■ Thrifts
■ Insurance
■ Government
■ Other
Source: Federal Reserve Flow of Funds Accounts of the United States
■ CMBS
CMBS Issuance
240
Billions of dollars
230
CMBS Issuances
200
206
169
160
120
93
80
78
74
58
49
40
52
0
1999
2002
Source: Commercial Mortgage Alert
2005
6
6
1Q
2Q
2008
0
0
3Q
4Q
Commercial Real Estate Debt Maturities
Including secured and unsecured debt
Billions of dollars
Source: Goldman Sachs and REIT filings
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Billions
Foreign Investment In US Real Estate
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
03
04
Source: Real Capital Analytics
05
06
07
08
YTD 09
Required Equity for
Commercial Real Estate Debt Maturities
($ in billions)
Cumul.
$130
$230
$400
$1,030
800
630
600
400
200
130
170
100
0
2008/2009
2010
2011
2012+
Note: Assumes conservative valuation decline of 20%, original LTV of 70%
and refinancing LTV of 60%. Required equity increases if value decline is
higher or LTV is lower.
Commercial Real Estate Markets
• Limited transactions since Sept. 2008
• Pricing down 40% +/- from peak
• Most recent deals had assumable debt,
seller financing, or lender facilitating sale
• Cap rates have increased 300 bp +/- while
rents have declined 15%+
• Loans in special servicing are growing $23 billion per month
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Securitization Markets Essential
• Record $1.2 trillion of private RMBS were
issued in 2005 and 2006
• CMBS peaked in 2007 at $237 billion
• No private new RMBS or CMBS have
been created since early 2008
• Critical to restore integrity of securitization
markets
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Renewed Liquidity Essential
•
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Central Banking Principles
• Central banks calm market panics by
expanding liquidity – lend into the panic
• Current Fed actions focused on credit
markets, outside banking system
• Immense scale of credit markets – beyond
reach of current regulatory mechanisms
• Reforms necessary
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“We knew how much of banking
depended upon make-believe or, stated
more conservatively, the vital part that
public confidence had in assuring
solvency.”
- Raymond Moley, a key presidential adviser to FDR
–Restore public confidence
–Assuring solvency
–Giant steps to address crisis
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Fed Liquidity Programs
1. Term Discount Window Program
2. Term Auction Facility
3. Primary Dealer Credit Facility
4. Transitional Credit Extensions
5. Reciprocal Currency Arrangements
6. Securities Lending
7. Term Securities Lending Facility
8. ABCP Money Market Fund Liquidity Facility
9. Commercial Paper Funding Facility
10. Money Market Investing Funding Facility
11. Term Asset-Backed Securities Loan Facility (TALF)
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Treasury Initiatives
• EESA authorized $700 billion for TARP
– $444 billion committed
– $365 billion disbursed
• Capital Purchase Program (CPP)
– $250 billion to banks
– Repayment of over $70 billion
• Home Affordable Modification Program
• Continued capital support to GSEs and MBS
purchases
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Recent Accomplishments
• Extension of the TALF through June, 2010
• Key provision of “ARRA” (HR 1) provides
important COD income relief until 2014
• New Treasury guidance allows servicers
to modify securitized loans “at any time”
without triggering REMIC tax
consequences – permits problems to be
addressed before loans default
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Term Asset Backed Securities Loan Facility
Potential Size of TALF
 Supports revival of credit
markets
 Collateralized lending to
AAA investors - opportunity
for levered funds
 Catalyze new issuance of
ABS, CMBS
 Tighten spreads
 Restore credit flows to key
sectors of the economy
$900 billion
AAA-Rated
ABS /
CMBS
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$100 billion
Asset Specific
Haircut
Funded
by
Federal
Reserve
Funded
by
TARP
Funded by
Investor
TALF Aiding Markets
• TALF “has shown early success in reducing risk
spreads and stimulating securitization activity”
• Responsible for $124 billion of new ABS backed
by auto leases, credit cards and smallequipment loans
• $8 billion in Legacy CMBS
• New Issue CMBS eligible for TALF – June
• Legacy CMBS eligible for TALF – July
• TALF extended through June 30, 2010
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Super Duper CMBS Treasury Spread
bps
1600
TALF Announced
12/01/08
TALF Terms
Amended
02/06/09
1400
1200
1000
800
600
First TALF
Funding
Announced
03/03/09
400
200
0
07/10/08
09/07/08
11/05/08
01/03/09
03/04/09
10-Yr Super Duper CMBS
05/02/09
06/30/09
Key TALF Issues
•
•
•
•
Low leverage does not fill liquidity gap
Warehousing credit still not available
TARP restrictions create investor concerns
Fed concerns about:
– Extracting liquidity at right time
– Exposure to large single borrowers
• June 30, 2010 expiration
• No new CMBS model has emerged
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Good News
• REITs have raised $23.3bn equity YTD
and $6.7bn unsecured debt
• Banks have raised over $100bn in capital
• Since February enactment of Cancellation
of Indebtedness (COD) provision, over $1
tn in debt restructuring and deleveraging
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Public-Private Investment Program
(P-PIP)
• Public-Private Investment Funds (PPIFs)
created with 1:1 equity from private
investors + USG
• Combines private capital with USG capital
• Potential USG leverage up to 6:1
• Private partners retain asset management
control
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PPIP – A Slow Start
• Legacy Securities Program
– Five firms have raised $3.07bn
– Matched by USG equity
– $9.02bn of additional debt capital
– Total $12.27bn of purchasing power
• Legacy Loans Program
– $64.2m paid for 50% equity stake in LLC
comprised of portfolio of residential mortgage
loans with $1.3bn in unpaid principal balance
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Five Point Plan
1. Enhance and extend the Term AssetBacked Securities Loan Facility (TALF)
program for CMBS
2. Establish federally-sponsored credit
facility for originating new loans: adapt PPIP structure; guaranty program based
on FDIC insurance model; covered bonds
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Five Point Plan
3. Encourage foreign investment in U.S. real
estate – revise Foreign Investment in
Real Property Tax Act (FIRPTA) and ECI
4. Encourage banks and servicers to extend
performing loans
5. Reject new anti-real estate investment
taxes (e.g., capital gains, like kind
exchanges and proposed tax hike on
partnership “carried interest”)
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Additional Measures Needed
• Credit facility concepts
– GSE for commercial real estate
– Adaptation of the LLP - PPIF “new” loans
– FDIC-like securitization guarantee program
– Financial institutions consortium
– Covered bonds
– Other ideas
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The Greening of Real Estate
• U.S. income property today accounts for
– 40% of energy consumption
– 70% of electrical energy consumption
– 30% GHG emissions (indirectly)
• EPA’s Energy Star Program has
– Reduced CO2 emissions by equivalent of
taking 8-12 million cars off the road annually
• LEED and energy-related tax incentives
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Cap and Trade
• Incentivize “green” investments by
– Property owners should own and trade CO2
reductions instead of allocating 100% carbontrading energy efficiency benefit to utilities
– Energy end users –building owners – should
participate in this emerging market
– Monetizing CO2 reductions created through
energy efficiency investments by users of
energy such as buildings
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climate
change
bill
Climate
Change
Legislation
• Renewed debate expected next year; possible
Senate action on stand-alone bill this year
• House passed bill in June; committee-passed
bill in Senate
• Both include positive incentives for energy
retrofits in existing buildings
• Also contain troublesome provisions that would,
in effect, nationalize building-code process
• Continue working to further moderate the coderelated language in the Senate version
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“Livability
LivabilityAgenda”
Agenda
• Significant upgrades of aging transportation
infrastructure (e.g., roads, highways, bridges)
• Forward-thinking investments in renewable
energy infrastructure, mass transit, and the
creation of a “smart energy grid”
• Promoting “mixed use” real estate development,
transit-oriented development and other key
concepts in the “smart growth” toolbox
• Consistent with our sustainability agenda
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Going Forward
• Develop governmental and private sector
initiatives that will restore economic growth
• Policymakers must articulate clear strategies to
address contraction of credit
– Priority now to restore/maintain credit flows
– Other new ideas necessary to fill equity gap
– Comprehensive approach to restoring job growth,
economic expansion, real estate market demand
• Continue to pursue new ideas
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