An article in yesterday's Wall St. Journal discussed Maguire Properties' (NYSE:MPG-OLD) loss of several buildings that it had recently acquired from Equity Office (EOP)/Blackstone (NYSE:BX). The poor economy and job losses have raised vacancy rates, and backfilling space with costly capex and lower rents left the buildings unable to meet their debt service requirements.
We have only just begun to see stories such as this, and in order to address the next crisis we will need to acknowledge some painful truths.
During the commercial real estate crisis in the late 80s and early 90s, thousands of buildings faced the same problem, but with a critical distinction. The real estate crisis was not coupled with a banking crisis. The two industries are, for better or worse, married to one another.
During the last crisis, programs like the Resolution Trust Corp. (RTC) did what a good oncologist would do--they removed the tumorous cells (loans). In some cases, banks failed, but depositors did not lose money and life went on. Further, pools of capital that had not overextended during the boom were able to step in and acquire properties and mortgages at sensible valuations. Indeed, some firms like JE Roberts built their fortunes during this time.
At the moment, replicating the sucess of that outcome is not possible. Unless there is a credit market available, there is simply not enough cash available to acquire what is coming back to the market, even at deep discounts.
While TALF can, if extended and properly managed, help restart the CMBS market for new loans, there is no realistic program in place to deal with the onslaught of "legacy" properties we can expect to see.
Ostensibly, the PPIP regime was created for this purpose, but because the banks cannot sell at discounts without taking further hits to capital, there are two problems. First, there are ready buyers, but few ready sellers. Second, TALF is only applicable to investment grade loans, so again, there is no credit market for the acquisition of the kinds of properties we expect to see.
So how can we resolve this conundrum? Perhaps it is worth considering allowing banks to provide seller financing for REO properties. In exchange, any bank that did would be permitted to continue to carry the property at the book value it held at the time of sale. That would encourage the banks to move the bad assets off of their balance sheets (albeit more slowly), and provide a form of credit for those acquirers who kept their noses clean during the bubble.
Disclosure: No positions.