What’s Next

Credit Markets
We have been encouraged recently by the performance of the credit markets. Clearly, our regional and community banks have benefited from rent regulation, which exists in the majority of the properties that these lenders provide capital for. Across the nation, these very banks are the ones that are being taken over by the F.D.I.C. (130 year-to-date), as some of them have well over 100 percent of their risk-based capital tied up in commercial real estate development projects.

That has not been the case here, as the community and regional banks have been consistently lending, particularly in the multifamily sector, throughout this crisis.

Large commercial and money center banks have, however, either been out of the commercial real estate lending business completely or have scaled back their lending platforms significantly.

The demand for refinancing that will exist over the next two to three years exceeds the capacity of the commercial banking and insurance industries combined. The shadow banking system provided approximately 40 percent of the leverage on commercial real estate transactions during our last cycle. This shadow banking sector, led mainly by CMBS, has all but evaporated from our marketplace. Issuance declined to only $12 billion in the first six months in 2008—it was a $230 billion industry in 2007—and there had been no CMBS issuance from July 2008 until recently.

The recent $400 million Developers Diversified Realty transaction was a tremendous shot in the arm to get this securitization market flowing again. While this was done at a very conservative 50 percent loan-to-value ratio, there is another transaction in the pipeline, which will be securitized by JPMorgan for about $600 million, that is projected to close at approximately 75 percent loan-to-value.

While the TALF and PPIP programs have not produced nearly the numbers that were anticipated, it is clear that credit spreads have been brought in considerably just based upon their sheer existence. These programs, which were well intended and based upon market conditions at the time they were conceived, would have been much more beneficial to the marketplace if those conditions still existed. Their positive impact on credit spreads, however, cannot be denied.

While our commercial real estate market has a long way to go to get back on its feet, we are clearly heading in the right direction. Our fundamentals appear to be approaching a bottom, and with that, the downward trajectory of value will reverse as well. We expect supply will rise as lenders increasingly seek to resolve troubled loans. This will satiate the excessive demand that is prevalent in the market and continues to grow day by day. Access to public capital will be a key to our ability to meet the demand for refinancing, and recent activity in the CMBS market is encouraging.

Our market is clearly cyclical, and the sooner we are able to get through our de-leveraging phase, the sooner we will be on the road to recovery.  


Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services and has brokered the sale of more than 1,000 properties in his career.

What’s Next