Economic turmoil

As numerous US public and private enterprises work to jump-start the national economy - much attention has been paid to restoring the health of the residential real estate market and the banking system. Yet, as the global recession has deepened, the commercial real estate market also faces distinct hardships.

A core challenge has been the lack of available liquidity for transactions. For instance, securitizing commercial loans, especially via Commercial Mortgage-Backed Securities (CMBS) has been a significant source of liquidity, fueling the prior growth in commercial real estate transactions. However, the freezing of the CMBS marketplace (issuances decreased from US$237 billion in 2007 to US$12 billion in the first half of 2008 with virtually nothing since then, according to JPMorgan Chase & Co. data) has caused transactions to grind to a halt.

This lack of transactions further complicates the ability to properly value property in the current marketplace. Real estate values have plummeted, and investors are waiting to see how low they will go. There is a fear among industry specialists that this investor inertia may cause a continuing downward spiral in prices, or, at a minimum, prolong the lack of activity.

Stimulating Credit Markets
One potential solution for this bleak situation is the inclusion of CMBS financing in the US-government-sponsored Term Asset-Backed Securities Loan Facility (TALF). Designed to stimulate the credit markets and restore stability by providing financing to purchase asset-backed securities, TALF was expanded by the Treasury Department to earmark US$100 billion to leverage US$1 trillion of lending. While TALF's inclusion of CMBS should stimulate the market, debate remains over how vigorously the various players will embrace the program.

Purchasing Legacy Assets
The US Government's Public-Private Investment Program (PPIP) provides public-sector equity and debt financing to private-sector investors to achieve two critical goals: attracting idle assets back into the market by tackling the inertia of private investors, while also freeing up embedded capital from the balance sheets of institutions. This mechanism will hopefully achieve the goal of creating a market for turmoilthese real-estate-related assets, enabling institutions to funnel funds into new credit formation.

It is hoped that restoring liquidity for new transactions - including those involving commercial real estate - will ultimately stimulate the economy. Additionally, greater clarity about asset values - gleaned from the resulting transactions - should boost investor confidence, increasing the amount of investment in the market for further transactions.

While investors and asset holders are still waiting for greater clarity on these programs to help determine the extent of their participation, the US Government has taken an activist stance to help resolve some of the core issues that initiated the global economic crisis. With financial leaders worldwide watching and evaluating what happens in the US economy, it remains to be seen whether the depth and breadth of this situation can be significantly affected by the actions of government.

Article author

Ray Milnes
Partner
Building Construction & Real Estate
KPMG in the US +1 312 665 5023 Ray Milnes View all articles by this author