We’re all well aware of the bad news in our industry. At this time last year, the economy was beginning to come off its pinnacle. The descent that followed came in the wake of the broad failures of financial institutions and the subsequent aftermath. The resulting job losses, lack of available credit from banks, and a frozen CMBS marketplace created a turbulent economic landscape. Commercial real estate wasn’t spared. In just over a year, we’ve gone from stability to volatility to decline.
But, is the end in sight? The hemorrhaging of job losses looks to be easing, and there are even a few areas of strength. Not surprisingly, government jobs are on the increase; healthcare jobs are as well. Since the beginning of the year, healthcare has added between 15,000 and 20,000 new jobs each month. This, of course, is good news for the medical office building market, which continues to be a sought-after asset class.
Construction, which has had been hit especially hard, is showing signs of stabilizing. According to Associated Builders and Contractors, nonresidential construction job losses slowed significantly in May, going from a monthly average of 10,000 job losses to 1,400 job losses. And, construction costs are down, so those who can afford to build are taking advantage of better pricing.
Many economists now believe that the recession will be over within a year. While no one is predicting a boomerang into full recovery, we are beginning to see the light. Because commercial real estate was hit late, we can also expect to be late to the recovery. 2010 will be another tough year for the marketplace, but look for signs of growth in 2011.
What can we expect between now and an eventual recovery, and what needs to happen for that to occur? The numbers are staggering – hundreds of billions of dollars of commercial real estate loans are coming due throughout 2009. And, by 2012, this may total more than $1 trillion. Banks have tightened underwriting standards, and the CMBS market is stagnant. The large volume of maturing commercial real estate loans threatens to cause further disruption to the economy – just when our banking system is making strides to rebound. Absent direct and decisive action by Congress, the Federal Reserve, and the Treasury Department, the upheaval will continue.
The Treasury Department recently made commercial mortgage-backed securities eligible collateral for the Term Asset-Backed Securities Loan Facility (TALF). This is significant because it helps prevent defaults on economically viable commercial properties, it increases the capacity of current holders of maturing mortgages to make additional loans, and it facilitates the sale of distressed properties; however, to be truly effective, this must be extended beyond the current Dec. 31, 2009, sunset date.
In July, several real estate associations (including BOMA Intl.) and major real estate firms came together to draft a consensus policy statement. The group agreed on several key principles that must be considered by Congress and the administration to provide stability and encourage lending.
Securitization Markets
- Promote policies that support the securitized credit markets and don‘t impede economic recovery and efforts aimed at facilitating the private market, such as TALF and the Public-Private Investment Program (PPIP).
- Ensure that accounting policy supports, and does not undermine, the securitized credit markets while promoting stability and confidence in our markets.
Federal Legislative and Regulatory Initiatives
- Support federal programs, such as TALF and PPIP, that seek to address the liquidity crisis and facilitate private market activity.
- Ensure that the TALF program is extended beyond Dec. 31, 2009.
- Ensure that current financial services regulatory reform efforts don’t negatively impact the efforts under way to revitalize and stabilize the commercial real estate market.
Tax Policy
- Promote federal tax policies that strengthen and support commercial real estate.
- Oppose modifications to current tax rules that would result in reduced property values in an already fragile marketplace.
We’re ready for recovery, and opportunities are before us, but a pivotal part of our recovery plan is playing out in the halls of Congress and in state capitals and city halls across the country.
Congress is changing and priorities are changing. We know that keeping real estate strong and the entrepreneurial spirit alive not only helps our industry, but the economy as a whole. But, we have to make sure our legislators know this.
Henry Chamberlain is president and COO at BOMA Intl. For more information on this and other topics, call BOMA Intl. at (202) 408-2662 or visit www.boma.org.
