Final Session at DLA Piper Summit Tackles Funding Worries

It was the last session in a long day, but the attendance was understandably strong at “The Outlook for Capital,” the closing session of “What Comes Next: Opportunities, Risks and Rewards,” the 2008 DLA Piper Global Real Estate Summit held Tuesday in Chicago. The panel discussion was dominated, of course, by debate and speculation about the federal government’s $700 billion bailout of the financial markets, also known as TARP, or the troubled assets relief program. Though he referred to “an excessive writedown of assets,” moderator Bruce Cohen, CEO of Chicago-based Wrightwood Capital, expressed a pervasive sentiment when he said that the response to the crisis is “less about filling a capital gap and more about providing confidence.” Promptness on the part of the federal government is crucial, said Lawrence Gray, head of real estate financing at Wachovia Securities, and will help to prevent more “shotgun marriages” like that between Bear Stearns and JPMorgan Chase. Several panelists emphasized the major differences between the current situation and the savings and loan meltdown of the late 1980s. The present fundamentals of commercial real estate are “substantial,” said Daniel Rubock, senior vice president & chief counsel, Moody’s Investors Service, and Lonny Henry, vice chairman of investment banking at JP Morgan Securities, commented, “Ultimately, it wasn’t commercial real estate values that undermined the CMBS market.” Rubock implicated “modern McCarthyism,” or guilt by association, in the crisis of confidence. In the minds of many investors, he said, if residential mortgages are so unsound, how safe can commercial mortgages be?Asked by Cohen whether the tarnishing of the rating agencies inhibits the return of investor confidence, Ruboc said that part of the problem has been that people use ratings as a proxy for value. He also noted that Moody’s is undertaking numerous internal reforms, and that in fact Moody’s lost market share back in April 2007 because it tightened its standards at that time and some clients moved to other rating agencies. There were some specific concerns voiced about the multi-family market in the aftermath of the current crisis. Henry noted that multi-family had essentially been subsidized by Fannie Mae’s and Freddie Mac’s policies and asked what could happen to multi-family values if those change. Rubock commented that the preliminary evidence is that Fannie’s and Freddie’s policies on multi-family will largely remain the same, though he questioned whether tax credits for affordable housing might be affected. Turning back to the core of the session’s topic, the panelists discussed how capital is, or hopefully will soon be, flowing. Gray said that Wachovia’s originations on construction loans are down 50 percent, but their outstandings are up 6 or 7 percent, simply because “We’re just not getting taken out” on existing construction loans. Before the crunch, he explained, these had been taken out primarily through the CMBS market. Responding to a question about a potentially increased role for the life insurance companies, Michael Graziano, managing director, Goldman Sachs & Co., contended that “The life companies cannot possibly handle the volume of commercial real estate loans coming due over the next two years.” Henry observed that life companies had been largely priced out of commercial real estate by the investment banks and are now coming back somewhat. As to loans rolling over, Rubock guessed that 10-year loans coming due will probably be all right, because of their adequate LTVs, and that recent 3-1-1 loans might be okay if the economy turns around by 2011 or so. “There’s a large amount of private equity waiting,” from investors who haven’t put any money out in a year or more, said Henry, though the panelists generally agreed with Graziano’s comment that “No one wants to stick their hand out and catch the falling knife,” especially with plenty of other investment options out there. Gray suggested that whatever federal initiative is put in charge of the bailout could play an invaluable role here: “Hopefully, they will be the preferred buyer as we find the bottom.”