"Although a few glimmers of economic improvement have been noted recently, such as better-than-expected employment numbers in November 2009 and the positive GDP growth in the third quarter of 2009, consumersand businesses remain anxious about spending, leading investors to believe that the road to recovery for both the US economy and the commercial real estate industry will be a long and bumpy one," according to PwC's report. Quoting a survey respondent, the report notes, "Until consistent job growth occurs, rental rates and net operating incomes will continue to dip further."
As Jeffrey Rogers, CEO of appraisal firm Integra Realty Resources recently told GlobeSt.com, job growth at present is largely in the hand of the Obama administration, and its skill at managing the growth process will help determine the speed of the recovery. In the meantime, PwC's Chuck DiRocco writes in the report, federal policymakers control what's going to happen with the $160-billion-plus of significant commercial mortgages currently in default as well as the "potentially large percentage" of maturing mortgages that will end up in the same boat.
The policy statement issued jointly by federal regulators on Oct. 30, "Prudent Commercial Real Estate Loan Workouts," is sure to provide "positive repercussions" in view of the 45% share of commercial mortgages held by banks, writes DiRocco, director and head of research for real estate business advisory services at PwC. First of all, "it will curtail maturity defaults, a potentially huge problem with all the commercial loans coming due." This new policy encourages loan modifications and extensions for creditworthy borrowers; "in some cases, even if a property's current value is below the loan amount."
DiRocco also cites the Internal Revenue Service's mid-September policy ruling on REMICs as another positive step. "It eased rules to permit special servicers to negotiate with borrowers prior to default, a move also meant to prevent a wave of maturity defaults and fire sales over the coming years," he writes.
Similarly, the FDIC's handling of the Corus Bank loan portfolio "conveyed a strong message that mass fire sales are unlikely," according to DiRocco. The "surprisingly high" sale price of 60 cents on the dollar and the provisions to discourage flipping the Corus assets to vulture investors reflected what DiRocco calls " a rational decision that many players in the industry have also arrived at: 'pretend and extend' is much preferred over 'foreclose and dispose.'"
These positive stances notwithstanding, "acquisition financing is still tough to come by," writes Robert M. White Jr., founder and president of Real Capital Analytics, in an article within the PwC report. White notes that unlike the multifamily market, the office, retail and lodging sectors do not enjoy the benefit of GSEs making loans. "Arguably, some banks could be considered GSEs, but there has yet to be a program to encourage them to lend again on commercial real estate," White writes.
He suggests that amending or repealing the Foreign Investment in Real Property Tax Act could help inject debt and equity capital into the US market immediately, since FIRPTA in its present form "discourages foreign capital." Although foreign buyers are growing more interested in US assets, currently only 10% of the purchases here come from overseas, "well below the global average of 28% and half the level of protectionist countries, like Japan and China."
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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.
