NEW YORK CITY-As economic unrest unfolds in Europe and the Dow recovers from a major 5.6% decline late Monday, members of the commercial real estate community tell GlobeSt.com that the possibility of another recession is the biggest factor threatening the industry after ratings agency Standard & Poor’s downgraded the US credit rating late Friday and Fannie Mae and Freddie Mac on Monday.
“If we are going into a recession and not getting growth, retail stores aren’t making money and offices aren’t expanding, those aren’t good for those product types,” says Paul Cairns, SVP - managing director of capital services at Minneapolis-based NorthMarq, who tells GlobeSt.com that while the downgrade itself won’t have an immediate impact on commercial properties, S&P’s actions will have a small effect on market spreads. “That is more of the risk.”
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In the midst of the financial frenzy following the downgrade, investors seeking safe havens purchased US government bonds, Swiss Francs and gold due to their low-level of risk. At the same time, Cairns says that yields have decreased and may go lower by the end of the year. “The fact that yields have dropped precipitously, we’ve been locking rates left and right on our multifamily deals, so it has not affected them in a negative way at all,” he says.
Richard Dorfman, head of the securitization group at New York and Washington, DC-based Securities Industry and Financial Markets Association, tells GlobeSt.com that based upon Fannie and Freddie’s direct reliance on the US government, investors should keep a watchful eye on the equity market. “One very prevailing theme among our members is that the activity around the event of--and the activity around--the Treasury downgrade, and possible downgrades or other market effect, is very much a part of the anxiety event concerning recession and concerning the equity markets,” Dorfman says. “It seems to be part of the greater picture of anxiety about the direction of the economy. It really shows how many and how strong the interconnect of products and markets really are. If you look for the driver, the equity market component overrides all else.”
On the CMBS front, Chris Killian, a VP of the securitization group at SIFMA, says that “some marginal spread widening occurred” on Monday, but nothing beyond what people expected. “The general view was that the market was very orderly,” Killian says. “There was liquidity and there were flows.”
While many on Wall Street drew comparisons from Monday’s events to the December 2008 market crash, Cairns says 2011 is deeply related to government cuts, global threats of debt default and lack of revenue instead of the housing bubble. “There is quite a difference,” he says. “At the time, Fannie and Freddie were failing and they were taken over by the government. It was quite a different scenario. Here you are seeing that there are many signs of bad economics. The downgrade just exacerbates it.”
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