--Olivia Thetgyi & Libby Sallaberry
came out as bearish on the commercial real estate market in his keynote speech today. We think fundamentals probably are still in a deteriorating mode... We think there will be lots of problems, he said.
Many of the problems in the commercial real estate market stem from how the loans were originated, Ross said. A lot of deals put on in 2005 to 2007 were done at very aggressive levels, that is, low cap rates, he said. Complexity of the deals is also an issue now in a distressed environment. Commercial mortgage-backed securities with many tranches will prove a boon for lawyers but a concern for investors due to their complexity and the fact their deal documentation has not been thoroughly tested yet.
Current conditions in the market do not bode well, either. Very early in the cycle, everything we see and hear suggests occupancy rates are going down, Ross said. The way commercial real estate loans are being worked out is also problematic, he said. First, they amend the loans, then they extend, then when that doesnt work, they just pretend about them. I believe were moving into the pretend mode as we speak, he said. Bank valuations of properties can pose problems, too. The problem with the banks is theyre not really marking things to market. It makes it hard to structure a joint venture if the markets view of the property is a lot lower than the banks view, he said.
When quizzed if he was concerned about the impact of rising interest rates on the residential and commercial real estate sectors, he said, Im less worried about interest rates going up next year than I am about the strength of the economy if there isnt another stimulus of some sort. That said, he noted government stimulus becomes more likely as elections approach.