"One of the positive things about the credit crunch is we got more educated on the economics. It's now common knowledge that two consecutive quarters of negative GDP is a recession," said John Leonard, vice president, regional manager at Marcus & Millichap. "Are we going to see that? I'm not sure but obviously we are in a slowdown." He added that we'll probably see at least one quarter of negative GDP, impacting office, industrial and retail.
A time out is how Todd Yates, senior vice president of the Alter Group, described the current market. "I think we are in a time out. The game hasn't been going real well. Nobody is really sure what to do. We're not ready to throw in the towel and say the game is over," he explained. "We hope when the time out is over things will be back like they used to be." He added that among the negative signs are positive one as well, but the biggest thing right now is the uncertainty.
More than just a slowdown, Warren Sander, vice president of Colonial Properties Trust, does say the R word out loud. "I think clearly we are in a recession," he said. "But what is interesting in the multifamily sector among the REITs and the Southeast is that fundamentals are remaining very strong. We are seeing effective rent growths and occupancy holding strong, if not improving, when everyone out of the gate thought the first quarter [of 2008] would be very tough. It has not really played out that way."
Recession or not, the country will pull through, noted US Sen. Johnny Isakson. And Isakson should know; he served for 20 years as president of Northside Realty. "I went through four real estate recessions--housing-based real estate recessions--in '68, '74, '81-'82, and '90-'91. We survived them all and we're going to survive this one," he said. "The root cause of all of those real estate slides, residentially, is precisely what is happening now and that is easy credit, shoddy underwriting and too much money."
There is one difference this time around, Isakson added, and it's Wall Street. "It used to be we had bank and savings and loan problems, and went through some terrible times, but this failure was a Wall Street failure," he explained. "You basically had guys on Wall Street securitizing subprime paper with a high risk and high yield, selling it to hedge funds who were borrowing 100% against their portfolios. When the values declined they couldn't meet their calls and that is basically what caused the crisis."
On the other side of the crisis, he said, loans were made to people who really weren't ready to be homeowners or at least weren't prepared for the sophistication of interest-only loans or bullets, or adjustable rates. "We are paying a price for that with a very high foreclosure rate."
Hal Barry, chairman of Barry Real Estate, also weighed on the possible recession during the RealShare feature Inside the Real Estate Mind with Michael Desiato, group publisher and vice president of ALM's Real Estate Media division. "On a macro basis, what has happened over the last several years is our mortgage companies got pretty bold and big," Barry said. "Instead of placing those loans, and selling those loans, they went to the bank, borrowed the money and closed billions of dollars worth of loans, laid those off to conduits owned by banks, which then laid them off further and everybody kept moving that paper on down.
"Meanwhile the standards on how those loans were made went from making 75% loans to 90% loans to 100%, where the real truth of the matter is that a lot of the loans made over this last period of years were well over 100% loans," he explained. "It is unfortunate the disciplines weren't in the industry and we're paying the price for it."
While some of the conference's panelists see a light at the end of the tunnel coming at the end of 2008, if not definitely in the beginning of 2009, Barry is looking at a three-year time frame. "It's going to pass," he said. "We overbuilt the residential business bad. How long is it going to take for growth to absorb that? Atlanta, thanks to [it's] continuing growth, will absorb this pretty good; the Southeast will be in pretty good shape. But it hasn't just been the growth markets that have been hit. My best guess is that it's going to take three years."
The RealShare Conference Series is produced by New York City-based Real Estate Media, which also publishes Real Estate Forum, Real Estate Florida, and GlobeSt.com.
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