Commercial Real Estate Begs for Bailout: Old Whine in New Bottle

By Simon Johnson

The commercial real estate industry would like a bailout – see my preview/links to testimony before the JEC today. This is not a surprise – even some of the most libertarian people I meet think the government should help them personally when times are bad. Is there a case treating commercial real estate as special?

The sector is definitely taking a beating, but who is not? This lobby’s most sophisticated advocates are arguing that various Fed facilities can be extended to support commercial real estate financing, i.e., so there is no cost to the government’s budget or your future taxes.

This is illusory.

We cannot have the Fed indefinitely take over the provision of credit to most of the economy. Asset prices need to fall and, if necessary, debts have to be restructured. This is easier, generally, for commercial real estate developers and operators than it is for residential mortgages.

The global crisis is surely not finished, but we are out of the panic phase. There is little compelling reason to provide “emergency” financial support to anyone at this point.

The price of retail space is falling because consumers are spending less and retailers are contracting or going out of business. This is painful and will turn around only when consumers figure out the new (higher) level of savings they want. We are already cushioning this blow with a big increase in public spending and a difficult future for public debt issues.

Going further for commercial real estate specifically is not appealing. If we do it for them, why not for everyone?

Of course, if commercial real estate worsens considerably, we will see further damage among banks. But didn’t the government stress tests assure us that the banks have enough capital to handle even worst case scenarios?

Comments

[Mad Hedge F...:]

I spent the evening with Dr. Janet Yellen, thepresident of the Federal Reserve Bank of San Francisco. Commercial real estate is at the top of her worry list, as fallingrents and capital values could create a downward spiral, furtherimpairing the banks. China’s wishes for an alternate reserve currencyare impractical. Answering questions as only a UC Berkeley professorcan, she further confirmed my belief that we are looking at an “L”shaped recovery at best (see www.madhedgefundtrader... and www.madhedgefundtrader... .

Jul 10 10:17 AM

[dcb:]

May I suggest for the readers look into the holdings of Goldman sachs, reggie middleton has some data on this. Huge in commerical realestate. More of your tax dollars to goldman's pockets.

Who will be overseeing the talf program for commerical real estate. I believe it is worth a trillion dollars (not sure). the NY Fed that's who. Who is head of NY Fed. I believe currently Dudley, former managing partner goldman sachs. what is the NY fed. The NY fed is a private bank owned by a "consortium" of wall street banks. This consortium selects those who serve in the board of the bank.

Is this anyway to oversee a program. Let those who will most benefit from it, choose the people who will determine what they get, and fill those positions with former partners.

The NY Fed oversee's wall street, which determines who is on the ny FED. BEING ABLE TO PICK ONE'S REGULATORS CAUSES CONFLICTS. Remember this when they tell you geitner never worked for wall street. No he was picked by the heads of wall street to be the person who looked over their shoulders. Do you think there is any chance they would pick someone who would consider for a second doing anything remotely that they didn't want. There isn't, which is why you see so many goldman partners there.

Jul 11 09:52 AM

[IGDICK:]

When commercial real estate and derviatives pop, and crash, there is no recovery for a generation. Govt. is powerless.

Jul 11 10:34 AM

[dcb:]

here is better idea of CMBS exposure.

once more a goldman subsidy!!!!

seekingalpha.com/artic...

Jul 11 10:37 AM

[Rhino Realty:]

The United States has 6 times more retail/commercial space than Europe. Why ? Because the banks provided far toooo much credit to retailers (ie Circuit City, Linens N Things etc..) and tooo much $$ for the developers. I spent the past 20 years of my career as a retail developer and I admit that the banks allowed my company to collect developer fees and loan to values that were excessive....the hardest part of this crisis is summed up in one word: LOSS. Nobody likes to lose. I certainly don't; however, in this game called 2009 Recession, there will be many losers, and perhaps no winners. All of the banks will lose because they all had a hand in the pie called Greed. Many REITs, Developers and Investors will also feel the pain ad they were under capitalized from the on set....The next game (called 2010 Turnaround), we will see fewer retailers, fewer developers, and fewer bankers. This should align the game to be more like the games played in Europe where there aren't drug stores, office supply stores, electronic stores or video stores on every corner. Cheers !

Jul 11 12:00 PM

[CRED Buyer:]

Just out of curiousity - where do the data that 6 times more reatil than Europe?


On Jul 11 12:00 PM Rhino Realty wrote:

> The United States has 6 times more retail/commercial space than Europe.
> Why ? Because the banks provided far toooo much credit to retailers
> (ie Circuit City, Linens N Things etc..) and tooo much $$ for the
> developers. I spent the past 20 years of my career as a retail developer
> and I admit that the banks allowed my company to collect developer
> fees and loan to values that were excessive....the hardest part of
> this crisis is summed up in one word: LOSS. Nobody likes to lose.
> I certainly don't; however, in this game called 2009 Recession, there
> will be many losers, and perhaps no winners. All of the banks will
> lose because they all had a hand in the pie called Greed. Many REITs,
> Developers and Investors will also feel the pain ad they were under
> capitalized from the on set....The next game (called 2010 Turnaround),
> we will see fewer retailers, fewer developers, and fewer bankers.
> This should align the game to be more like the games played in Europe
> where there aren't drug stores, office supply stores, electronic
> stores or video stores on every corner. Cheers !

Jul 13 11:51 AM

[Rhino Realty:]

ULI ...there was a good article on this subject in Forbes a few weeks ago...I think the actual statistic was "6x more per capita"...seems like the UShas 3 category killers of every retailer (electronics, drug stores, pet stores, etc..)...of course, the economic conditions are weeding out the weaker chains.


On Jul 13 11:51 AM CRED Buyer wrote:

> Just out of curiousity - where do the data that 6 times more reatil
> than Europe?

Jul 14 12:50 AM