Finance

Thank you to everyone who responded to last issue’s story regarding the availability of apartment financing through Fannie Mae and Freddie Mac. The two agencies continue to be diamonds in the real estate finance rough. As more and more sources of capital continue to disappear, the strength of these agencies becomes increasingly vital. Please continue to send along your comments, as they help to shape future topics in this column.

Does 2008 seem to be moving very slowly? In the past, I’ve always marveled at how quickly the months flew by and how one season ran right into the next. Before I knew it, it was time to turn the calendar page to another year. This year is different though. For me, it feels like it should be time to turn the page over to 2009 already. That’s not a good sign when it’s only the middle of summer!

But since it feels like 12 months have passed already, I believe that it’s a good opportunity to take stock of the year. More importantly - and hopefully more enjoyably — it’s a good time to look forward to the future.
On the surface, it has not been a good year for the commercial real estate industry. One only has to watch the news or read the paper to know that the overwhelming sentiment in our business is one of negativity. Capitalization rates are rising, sales volume has slowed dramatically, and loan delinquencies are on the rise. Some very high profile owners and lenders have gotten themselves in trouble, and of course the mainstream media has harped on these stories. Perhaps most troubling in my opinion is that politicians have taken advantage of these circumstances to cast mortgage companies and landlords as evildoers.
There are of course other sides to every story. Some contrarians view this as a great opportunity to be in the market. Those with cash and a strong stomach are taking advantage of desperate sellers and limited competition to once again purchase real estate on favorable terms. For those few who are benefiting from this market, good for them. But let’s not fool ourselves; the overall state of the market through the first half of the year has been trending in the wrong direction.

But we keep our heads up. I, for one, am a very strong believer in constant cycles for both real estate and the larger economic picture. In order for a market to be healthy, it has to get sick once in a while. The sickness helps to clear away some of the bad elements and helps us to focus on how to be even stronger in the future. Unfortunately for most of us, this is a lingering sickness and it doesn’t seem to be going away so quickly. But we’re making some positive changes and a healthier environment is in sight.

Will we be completely healthy before the end of this slowly moving calendar year? That does not appear to be the case. Are we still heading in the wrong direction and facing several years of negative trends in the real estate industry? That certainly does not appear likely either. But what does seem evident is that we will be facing a bumpy road throughout the rest of the year. That does not necessarily imply negativity, but it does mean that we should brace ourselves for some ups and downs before we can start heading in the right direction again.

In other words, the only thing that we know for sure is that we will not be sure about the state of our industry over the near term. The problem is not that things are falling apart. That was the story over the past 12 months due to the rapid downtown in residential housing, the failure of the CMBS market, and the collapse of some major financial institutions. Hopefully we are beginning to move beyond those monumental issues.
There are two major items in our near future though which guarantee uncertainty throughout the rest of the year. The first is interest rates. From a lender’s perspective, it has been very difficult to watch treasury and mortgage rates sometimes fluctuate by 50 basis points in the period of a week. I can only imagine the heartache of watching the same movements from the perspective of a borrower.

Unfortunately this volatility will continue due to the very mixed signals which come from economic data reports every day. I do not envy Ben Bernanke, or the other Fed policy makers, who appear to be schizophrenic due to no fault of their own. Mixed messages will most likely continue to prevail.

The other major event which will guarantee market uncertainty is the upcoming presidential election. I will certainly not opine on which candidate would be better for our ailing real estate industry, however I do surmise that any clear path towards one direction or the other will speed up the recovery process. In general, political uncertainty breeds market uncertainty, and therefore our economy will have a difficult time getting back on track until a winner begins to emerge. When that picture becomes a bit clearer, I believe that market stability will begin to replace the dizzying volatility which has characterized 2008.
Among both major presidential candidates, there is an overriding effort to stress the notion of change. Within a few months, that change will be upon us, and increased stability should begin to replace our current state of volatility.

Questions? Just Ask.

Mark Levine is a Vice President with PNC ARCS in their San Francisco office. He can be reached at 415-981-9700 or via email at Mark_Levine@arcscommercial.com