Dislocation in commercial market isn’t sellers’ fault alone

John Maynard Keynes is perhaps best known for his economic views that advocate heavy government intervention to ensure that markets run smoothly. He was once quoted as saying: "Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."

While the events of the past year have made Keynesian theories popular again, implementation issues are hounding the current administration and markets.

As if caught between two songs by reggae legend Jimmy Cliff, those wrapped up in the ever-changing landscape of commercial real estate on one day "Can See Clearly Now" only to have "Many Rivers to Cross" the next day. Financing, sales and leasing transactions are taking longer to get done, and once-easy-to-solve problems have become gantlets to closing.

Although there are plenty of reasons for the current dislocation in the market, lack of credit is a root problem the government is trying to address. Commercial real estate is inherently a capital-intensive business, with capital supplied primarily from three sources: commercial banks, institutional investors (insurance companies and pension funds) and Wall Street.

Healthy or unhealthy, there are very few banks or institutional investors that are not overweighted in real estate today -- a fact that translates to these two sources moving real estate loans off their books, not adding to their real estate exposure.

That leaves Wall Street, and it is well-documented that this side of the market has been shut down for more than a year now. Interestingly, Wall Street is where the government has chosen to attack the credit problem.

By including commercial mortgage-backed securities in the assets that can be acquired through the $1 billion Term Asset-Backed-Securities Loan Facility program, the hope is that the market can begin to rebuild and return some liquidity to commercial real estate as well as other industries currently shut out. It also has the added benefit of creating some liquidity for banks and institutional investors that hold TALF-eligible assets.

Participants in commercial real estate have generally endorsed the plan, but it is not without multiple obstacles. According to one market participant, TALF could tighten pricing on AAA-rated CMBS by 3 percent to 4 percent. One obstacle is that even a 3 percent to 4 percent tightening in AAA prices would still leave the market shut down for new loans. Another hurdle is trying to get private hedge funds to "partner" with the U.S. government.

In the meantime, according to the John B. Levy & Company National Mortgage Survey, conservative fiveand 10-year commercial mortgage loans are still available at pricing in the 6.5 percent to 7.75 percent range, with larger loans pricing higher than smaller loans. Rates for Fannie Maeand Freddie Mac-eligible properties are lower, but the government's bureaucratic hand is clearly affecting the ability of developers to get deals done efficiently.

All the dislocation in the market has been blamed on sellers not adjusting to new realities in the market. Arguably, the opposite is true. Buyers, like lenders, are nervous and skittish and not able to get a feel for what the long run looks like. Sales brokers across the country report large institutional sellers making strategic decisions to prune their portfolios or exit a market at fire-sale prices, only to find their lowered price expectations are not met.

In Richmond, long-term owners are wading into the market in hopes of shedding a piece of their portfolio at a price that only a year ago would have seemed unimaginably low. While it will be up to the buyers to determine if the sale prices are reasonable, getting buyers off the fence is difficult today. It seems as if all buyers are waiting for some longer-term sign to emerge that could help them make an investment decision.

Another quote from Keynes was: "In the long run, we're all dead."