"The agencies are facing a double-edged sword right now," says Korologos, managing director with Deloitte's real estate consulting practice. "On the one hand, they have to rebuild credibility. In doing that, they have to let the market participants know that 'we're going to do the right job for you. Part of the problem in the past was that we faced this 500-year flood where everything went south very fast, well beyond what we thought was going to be the case. Our ratings didn't capture that. So we're going to be more conservative now.' "
On the other hand, he says, "We have to create liquidity in the marketplace. Of the $3.5 trillion commercial real estate loan market, about a quarter of that is CMBS and about half is commercial banks. So you're talking about $800 billion that really has no replacement liquidity right now."
He adds, "I truly believe the securitized market could work, but you've got to get back to fundamentals and not have it to be about how much creativity you could cook up in the lab. It's got to be simple and it's got to be transparent for investors to do their own due diligence. Then you'll get some liquidity back. But if the rating agencies are too conservative in analyzing deals, then it's going to prevent the liquidity from coming back. If they're offensively too conservative, then the issuers and borrowers are going to say 'we need to some find some other way of borrowing, because this is too costly and too uncertain.' "
Among the perceptual challenges rating agencies have faced, says Korologos, is having to let staffers go because of deal volume dropping off. That could make it challenging to attract the kind of experienced talent that can "analyze a deal, look at the risk and appropriately rate it. It's going to be hard to attract that kind of talent because the story they were able to tell before—it was a stable environment and you could stay as long as you want—doesn't hold true anymore."
Additionally, there's the "bashing" the agencies have taken in the media, some of which is deserved and some of which is investors ducking their own responsibility, says Korologos. in the market. Also, he says, "the models have some challenges. They're going to have to revisit them to see what's the right to measure risk now. All of this has to be figured out at the same time." There's also the specter of increased government oversight, and Korologos says he hopes that can be avoided.
The proof, though, we be in the pudding. Most of the CMBS actions that the agencies have taken over the past several months have consisted of affirming or downgrading the ratings of legacy securities from the market's peak. "There haven't been any deals in the very recent past; there are a couple pending through the TALF program," Korologos says. "So it's hard to gauge how they're reporting the deals, the kind of analysis they're doing, because none of that has been made public yet. Once those deals happen, there will be some information out there to be able to look at and say, 'Here are some things we're doing differently to rebuild your confidence, Mr. and Mrs. Investor.'"
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
