While the election results would have seemed to send a clear message to the Democrats, it is very clear they are tone deaf. Obama now claims it was not his policy that was wrong, it was that the voters are stupid and he did not do a good job of explaining his policies of over regulation, huge deficits, and higher taxes. Nancy seems to think she needs to man the ramparts and defend the economy killing laws she shoved down our throats. Harry, who stole the election by forcing the casinos to bus over 40,000 unionized casino worker to the polls and paying them with food and k Mart gift cards, is already saying he will give no ground. The Tea Party electees say they will fight. Bottom line is partisanship will be even worse. None of the fixes needed will happen. Maybe they will extend all tax rates for another year, but that really does not do much. Obamacare will be a giant fight. Obama will turn loose the NLRB to do card check de facto. EPA will pass new regs which will kill many businesses including put materially added costs on commercial real estate. Elizabeth warren will do her best to get regs in place to kill consumer lending and harm bank profits. What Obama can no longer get through Congress will be done by regulatory fiat. Fin Reg will be designed by Obama appointees. Obamacare regs will be set forth by Obama appointees. What can’t get passed as tax increases in Congress will now be new fees and fines by regulators trying to get revenue. In short, the administration and Democrats in Congress continue to ignore the voters and are determined to just continue to try to ramp up the philosophy of, we know better and we and the unions from whom we take huge payoffs will tell you how to run your business. This is not conducive for the economy to recover quickly, nor for real estate values to materially rise in the short run.

The dollar will continue to be weak because historically governments suffering form severe economic downturns try to devalue their currencies and promote exports to try to rebuild their economy. They always way over sped thinking fiscal excess will stimulate growth. In the end they create new inflation. You see that expectation in the price of gold and commodities. While I have heard CRE owners say inflation is good because I can raise rents and asset values will rise, the reality is this is not what we want longer term. It always ends badly when inflation runs too high. Rates have to be raised to very high levels by the Fed as we saw in the early eighties and then real estate suffers. In the meantime, investors are sending their money offshore to emerging markets where returns are much better today. This is not good for CRE as it means a lot less potential investor dollars coming to the US for buying buildings. Although there is more money than deals right now, that will change over the next 2-3 years and if the foreign and private equity money is going offshore, and interest rates here are rising, values here will not rise to the levels many hope.

Uncertainty is as great as before the election. Maybe even more so. Now with the political mix we are about to have and with Nancy still in a leadership position, and harry still running the Senate, and Obama making excuses not seeing the need to change policy, there is no hope of the Regan/ O Neil era bipartisanship that solved problems back then. The black swans continue to circle the lake, and the potential for a major negative event remain all too possible.

If the RBS buyers do prevail in court and force huge buy backs of notes, then look out for CMBS to see the same legal issues. There is no difference. We all know there was incompetent and very sloppy underwriting of CRE in the 04-07 period, so the lawyers will be able to make the same arguments to force bond buybacks.

Bottom line, uncertainty reigns and is not going to get better. Gridlock will likely prevail and regulatory fascism will be ramped up. Bank lending is not going to suddenly get better, especially for troubled real estate owners in places other than the major cities. CMBS will increase, but not to the extent of providing anywhere near the capital the industry requires. History of bank crises tells us we have a very long way to go on value enhancement, and all in returns will need to be realistic at mid teens levels, or lower, and extend and pretend will need to continue just like it is on residential.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.