Instability in Financial Markets Expected to Spread to Property Markets Commercial Real Estate Industry Sees Trouble on Wall Street Spilling Over to Main Street The extraordinary turmoil and historic events on Wall Street over the past two weeks will ultimately come to settle on commercial real estate on Main Streets across America. That's the consensus of a wide range of industry executives CoStar Group contacted this week.
While the people we contacted said the extent of the problem from the flood of events is hard enough to grasp, let alone predict where they will end up, the fear and mood in the market are tangible and the results are clearly evident.
SPECIAL REPORT
Crisis On Wall Street, Impact On Main Street
by CoStar Senior News Editor Mark Heschmeyer
SEE RELATED STORIES:
· Credit Markets Have Been Devastated · Property Values Going in the Only Direction They Can Right Now: Down · What Impact Will Mounting Wall Street Troubles Have On Property Fundamentals?
"This market fear will further tighten the available debt for borrowers, tenants, and small businesses looking to grow," said Mike McMillen, managing director of RCG Ventures in Atlanta. "In addition to the fear this has created, many institutions were holding Freddie, Fannie, Lehman, or AIG paper which will cause a double dose of reality. This will further slow credit availability and will hurt tenants that need capital, reduce the flow of new acquisitions, and lead to a much slower real estate economy. Even though none of us have a crystal ball, it is my assumption that this is not a one- to two-year problem. We expect to feel the real estate "hangover" well into 2010."
In two weeks, we have seen the federal government takeover of mortgage giants Fannie Mae and Freddie Mac and insurance giant American International General (AIG). We have seen the collapse into bankruptcy of Lehman Brothers Holdings as the federal government stood by unwilling to bail it out as it had Bear Stearns last spring. We have seen Merrill Lynch shoved into a sale to Bank of America at the federal governments urging. And we have seen buyers around the world coming in to pick apart Lehman Bros. piece by piece at fire sale prices, including its 1 million-square-foot headquarters, data centers and entire North American investment banking unit. We have seen federal regulators start shopping Washington Mutual Inc. And reports were spreading that independent investment bank Morgan Stanley was considering entering into a merger with Wachovia to prevent a similar erosion that befell Lehman and Bears.
In short, we have seen the crumbling of Wall Street and its erosion will be felt directly across the New York City commercial real estate market, and indirectly in markets across the country.
"To see renowned institutions go over the precipice or vanish into the vapor, are events that most would presume to have been unfathomable," said Lee Meekcoms, president and CEO of Parkridge Capital Group Inc. in Clearwater, FL. "The uncontrolled greed and ingenious mechanisms to create vehicles to trade off risk, were, in the end, way too risky. Leveraging up on enormous amounts of debt and derivatives has resulted in a catastrophe of proportions not seen in the lifetimes of most of us."
"The lack of credit for the foreseeable months, as banks build up capital and/or other institutions continue to de-leverage and get back to a safer existence, will be constrictive to dealmaking in the near- to mid-term," Meekcoms said. "This should have a downward pressure on pricing, as there will be owners that really want to exit; the motivated one's will be the deals that get made."
"The effect of loans coming due on quality assets that require refinance presents a bit of a puzzle... What are the lenders to do when the loan is due and no re-fi money is around? -- Extending would seem to be wise. Will this also pose a downward pressure? In all events, the need for capital across the spectrum of the economy will be significant," he added. "Moreover, as capital is less available, and as residential real estate values continue to eke (or spiral - depending on the market) downward in value, can the commercial and multifamily market avoid downward adjustments? Anything is possible. Certainly top-tier markets and the best located properties have escaped without being scorched too much, but we are in uncharted waters here."
"So, until stability returns to Main Street, the commercial and investment side will likely stay in a tenuous mode," Meekcoms said. "Risk drives rates -- People like predictability. Lack of it unsettles markets. Perhaps Fannie and Freddie's re-emergence, along with the return of other capital, will bring the boat around. ... As the old saying goes, and it was true for some time across the spectrum of realty - "all boats rise on an incoming tide" -- the converse also appears to be true."
All of that uncertainty will make its way down the streets of markets across the country.
"The next shoe to drop will be regional and community banks. We expect well over a 100 bank failures in the next 12 months," said Jay Rollins, president of JCR Capital in Denver. "We are still in the fourth or fifth inning of this. This is a painful de-leveraging process. There will be more pain to come. Yet, we should not forget the excess that got us here. It was a big party and now there is a big hangover."
"I think it is hard for "Main Street" to not be effected by this. The results of the last few days results in real jobs being cut, real dollars being pulled off the table throughout the economy and real fear spreading among everyday Americans."
Glen Weinberg with Fairview Commercial Lending in Denver has seen the concern spread well beyond anything he imagined.
"My wife teaches sophomores in high-school (math); she does a unit on finance. Every kid came in the room asking about Wall Street, etc," Weinberg said. "It was so profound that she asked if I would come in and explain to her class the current market impacts and what it means. When high-school kids start to think about financial news and are curious on the impact, to me it means that the pain has clearly spilled to main street America."
McMillen of RCG Ventures said that the drop in housing values and stock values has the consumer scared and thus Main Street has already been feeling the effect.
"We are a consumer driven economy and the consumer is feeling the pain," McMillen said. "Credit cards are maxed out, there is no equity remaining in the average consumer's home (actually negative equity for many due to the over finance second mortgage craze). Jobs are being cut, wages are either flat or decreasing, 401k plans have lost a lot of value, and the media will do nothing but "feed the hysteria" of the bad stories. I think the average consumer is scared and until something significant changes, this will continue. This will be felt in restaurants, retailers, and our service industry. When you hear people in the upper class canceling trips, cooking out vs. going out to dinner, and an overall increase in hesitancy to spend money; you have to believe this is being felt even greater in the towns where the average household income is $60,000 or less."
Lon Rubackin, managing partner GFI Retail Group in New York, summed it up best.
"Wall Street's problems are the entire country's problems at the moment, you cannot separate them like in the past," Rubackin said. "With the country close to recession or all ready in recession and the liquidly crisis still front and center, the two unfortunately are intertwined."
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