Even if they had saved Lehman, the underlying flaws in the system were still there.
Without a doubt. Underwriting of loans got to be too aggressive, from a loan-to-value standpoint, too aggressive in terms of interest rates. But at the end of the day, it was still being done with very strong real estate fundamentals.
So let’s talk about Manhattan commercial real estate. What do you think is going to replace …
… CMBS debt that’s no longer here?
Well, that’s a good question that I wasn’t going to ask.
Sorry. That’s like a politician in an interview [who is asked], ‘So Scott, how’s the weather today?’ ‘Well, let me tell you about my health care policy.’
What do you think will replace CMBS debt?
In the early ’90s, nobody thought that anything would come in to replace the broken [savings and loans]. And CMBS came in to replace that. Here today, people are like, ‘What’s going to replace CMBS?’ Something will replace it. … Number one, the banks are going to take more risk onto their balance sheets with respect to a piece of the security. Number two, private-equity firms, at least short-term, are going to step in to do it. Number three, insurance companies are going to get healthier again and they’ll be able to get back to historical lending standards. The issue is going to be the volume of the capital.
What I was going to ask is what sort of tenants will occupy the space once belonging to the financial services industry and the hedge funds?
New York’s economy has gotten far more skewed toward the financial services industry the past 25 or 30 years than obviously ever before. Will a new industry come in to take its place? It’s very hard to say. But I would suspect that given the infrastructure, the human capital of the New York City market, I’m very confident that some of the traditional industries will ultimately fill that void.
Is it safe to say we’re just at the preliminary stages of all of this unwinding?
Yes, and what’s interesting about it is, I’ve been … meeting with a lot of investors. … I’ve handed a lot of these investors a white sheet of paper and said, ‘O.K., you’ve got capital. Please write for me on this white sheet of paper what you will buy.’ … When it comes right down to it, very few of them can fill out that piece of paper, notwithstanding how much cash they have, because there is a tremendous amount of uncertainty out there.
So, when are we going to see this deluge of hard distressed assets, distressed skyscrapers and the like, coming to the market?
My answer is, hopefully never. But if the fundamentals continue to weaken, if the capital market conditions continue to stay frozen, it may not be for another six to nine months, maybe longer. Because the same thing that got us into this problem, or one of the things that got us into this problem, was overaggressive lending. It’s also the same thing that’s protecting us from falling faster, because overaggressive lending means that they lent at higher loan-to-values than you are going to get today and at lower rates. And a lot of this paper doesn’t come due till 2015 or 2016, so a lot of the problem may be deferred six or seven years out.
By which point the economy presumably will have recovered?