The “extend-and-pretend” strategy, employed by banks in league with government agencies, in the U.S. as well as Europe, continues to benefit many cash-strapped borrowers and bank shareholders for now. Financial institutions aren’t forced to recognize losses on their books and borrowers can hold onto their properties at least for a while longer. Government regulators conveniently look the other way so banks aren’t forced to write down portfolios by recognizing defaults and engaging in foreclosures. At all costs everyone collectively wants to avoid setting off a panic over the fragility of the global financial system. So we hear the pr spin about how the banks are strong again—just they aren’t lending much—all the while the FDIC quietly takes over more financial institutions—saddled with bad residential, land, construction loans —on a weekly basis.
At the same time, the Federal Reserve keeps interest rates artificially low to prop up the banks further--they basically take free money from the fed and lend what they can at higher interest rates, which helps them shore up depleted reserves and keep their businesses going.
Investment bankers, meanwhile, gnash their teeth over pending regulatory reform and tax changes that “will make business more expensive.” The pr spin is they won’t be able to take as many reasonable risks to finance enterprises to encourage entrepreneurial growth and advance the economy. But their real concern is over how transaction activity may be constrained—eating into promotes and transaction fees, especially for high risk activities where personally they’ve had little downside with the potential for big upside.
Individual bankers viscerally resist the swing to greater prudence—many have continued to collect fat bonuses on various trading strategies using government funds despite the wretched condition of underlying financial balance sheets. And now real estate opportunity funds and private equity managers fret over losing committed capital before investment terms expire—since they can’t find good deals in the market.
But they can’t have it all ways. The government tactics, which prop up the capital markets, delay property markets from clearing in a wave of opportune distress for investors with cash.
It’s a schizophrenic environment—investment advisors and bankers drowning with their legacy funds in the tank are frustrated over the lack of anticipated home-run (promote rich) deals for new funds at market bottom. Many decry the heavy hand of government which takes away carried interest tax breaks, and conveniently ignore where they’d be without the bailouts.
And the Obama Administration and regulators tiptoe around what’s really happening too— hoping that the economy turns around fast enough to help cushion the necessary massive de-leveraging that still must occur. They know if markets get unsettled about the real dimension of the problems, all bets are off on sustained recovery—witness recent angst over Greece—and all bets are off about reelection in 2012.
That gets us back to our last blog about anemic fundamentals. The economy isn’t getting back in gear fast enough to help extend-and- pretend bear much fruit. Property cash flows aren’t increasing as more borrower reserves run dry, although some borrowers with more stabilized properties will scrape through and be able to refinance.
Ultimately, inflation may be the only way out of this rather large mess.
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Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
