Surviving the Cycle

By Hunt, Kristin Gunderson | Journal of Property Management, September/October 2010 | Go to article overview

Surviving the Cycle


Hunt, Kristin Gunderson, Journal of Property Management


IREM MEMBERS DISCUSS REAL ESTATE CYCLES AND HOW TO MANAGE THROUGH THE DOWNTURN BY KRISTIN GUNDERSON HUNT

What goes around comes around: Real estate is no exception to this rule.

"Real estate is by nature a cyclical investment, seemingly in 8-10 year cycles," said Larry Baiamonte, CPM*, a senior investment professional in the real estate equities division at Nationwide Insurance in Columbus, Ohio. "Some downturns are minor. Some are major."

He said while no two downturns are exactly alike, lessons can be learned from the past to help real estate managers cope with today's market and go forward with ammunition to handle future downturns.

"The benefit of comparing and contrasting is to learn from history and take the lessons of what worked and didn't work and apply them to today's downturn so we can make the best of it," Baiamonte said.

* WHERE WE STAND *

Commercial property values have fallen more than 40 percent since the beginning of 2007, according to the Congressional Oversight Panel's February 2010 oversight report, "Commercial Real Estate Losses and the Risk to Financial Stability."

The report highlighted vacancy rates ranging from 8 percent for multifamily housing to 18 percent for office buildings. Rents for office space have declined by 40 percent and retail space rents have fallen 33 percent.

Further, the report suggested between 2010 and 2014, refinancing will be necessary for about $1.4 trillion in commercial real estate loans. Nearly half are already underwater, meaning the borrower owes more than his or her property is currently worth.

The report also noted the largest commercial real estate loan losses are projected for 2011 and beyond, with losses at banks reaching as high as $200-$300 billion. The financial strain on banks is a major difference between today's downturn, and the savings and loan crisis in the 1980s and 1990s.

Baiamonte attributed the current strain on banks to the broadness of the downturn and how it has affected virtually every asset class. He said banks' capital have been greatly reduced because all investment types have been hit hard, while real estate was the main asset class hit during the savings and loans crisis. Banks simply don't have the capital to offer financing.

"Today, financing is virtually unavailable, although it is becoming slightly more available [than it was in early 2010 and all of 2009]," Baiamonte said. "[During the 1980s and 1990s] sellers might not have liked the price they were selling at, but buyers could get financing."

WHERE WE STOOD

The savings and loans crisis was the failure of more than 700 specialized financial institutions that accept savings deposits and make smaller personal loans, such as mortgages and car loans.

In the early 1980s the government allowed these struggling banks to raise interest rates on deposits, make commercial and consumer loans, and removed restrictions on loan-to-value ratios. The banks also began taking on risky real estate loans. Eventually they began to fail.

The bailout of these institutions cost taxpayers more than $124 billion, through increased taxes and charges to their savings and loans accounts, according to information from the FDIC.

Additionally, the federal government formed the Resolution Trust Corporation (RTC) to take over and dispose of real estate-related assets declared insolvent by the Office of Thrift Supervision - another major difference between today's real estate crisis and the one resulting from the savings and loan crisis, Baiamonte said.

No entity has been created to remedy today's real estate meltdown, whereas the RTC cleared out problem real estate fairly quickly, even if it resulted in real estate values falling around 35 percent, he said.

"Banks are working through all their commercial mortgage backed securities loans at a much slower pace," Baiamonte said. "It will certainly drag out recovery, and it won't recover as fast as it did last time. …

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