STIMULUS PROGRAM COULD BENEFIT COMMERCIAL REAL ESTATE

Several opinions about the impact of the stimulus program on commercial real estate are offered in the following article from the National Real Estate Investor

Government Stimulus Programs Could Benefit Commercial Real Estate

Feb 18, 2009 3:28 PM, By Denise Kalette , National Real Estate Investor

It’s been a busy week for President Barack Obama. On Tuesday he signed into law his $787 billion economic stimulus plan. Earlier today, he unveiled a $75 billion program to stem the tide of home foreclosures. To what extent will these moves benefit the commercial real estate industry? NREI asked a handful of economists and industry experts to weigh in on whether the president’s prescription for the economy and the housing market will work.

The Homeowner Affordability and Stability Plan unveiled today will help as many as nine million families restructure or refinance their mortgages to avoid foreclosure, according to the Obama administration. The program provides financial incentives for both borrowers and lenders working to reduce the risk of default.

The homeowner plan could have a trickle-down effect for commercial real estate, says John Terrence Farris, director of the master of real estate development program at Clemson University. Farris is a former community development consultant and subcontractor in Columbia, S.C. and other cities.

“Any way we can get the housing market protected so it has a bottoming out, such that mortgagees and mortgagors are protected and inventory is reduced because of that stabilization, the effect on the housing market will certainly be positive,” says Farris. Increasing housing production and reducing the inventory of unsold properties will in turn benefit the retail industry, he says. “Retail follows rooftops.”

Once the residential housing market stabilizes and turns around, commercial real estate will see results, adds Farris. And if Obama’s program reduces mortgage expenditures, that may free up consumer cash for retail spending. But critics of the plan say it will help on the margin but won’t do enough to stop the downward slide in housing prices.

The housing market is not functioning properly because of the bid-ask gap between buyers and sellers, notes Donald Haurin, professor of economics at Ohio State University and president of the American Real Estate and Urban Economics Association. Sellers think prices are too low despite the fact that on a historical basis housing prices remain above average, he says.

Left on its own, the housing market is likely to remain anemic, Haurin says, and government intervention could help. “With relatively low demand for residential property, with existing homeowners unwilling to market their properties, and with the foreclosure issue, that suggests to me that prices will be relatively weak for the foreseeable future. It means we’ll have a relatively depressed housing sector. I don’t think we’ve hit bottom yet.”

The downturn has also affected the multifamily sector, including rentals and condos. Although some analysts had expected that multifamily rentals would profit from the downturn in the residential market and a drop in apartment construction, that effect has been dampened by the widespread economic slowdown, Haurin says. “The whole economy is depressed.”

David Geltner, professor of real estate finance at the Massachusetts Institute of Technology Center for Real Estate, says the president’s stimulus plan is a good idea, but it’s not large enough. “It would have been big enough six months ago. This economy is in a spiral, and it’s spiraling down pretty quick. [The stimulus] is better than nothing but it’s not going to be enough to jolt us out of this recession,” he says.

“At first the problem with commercial real estate was the financial crisis and lack of liquidity and a driving up of cap rates, so that values were taking a hit from that regard. But now a more fundamental threat to real estate is the loss of income. Tenants are vacating spaces. Some office, industrial and retail tenants are going bankrupt.” Because of the recession, commercial property sectors face a serious threat of declining income, as commercial rents slide downward, Geltner says.

Still, the new stimulus package and the effort to encourage consumers to spend will benefit commercial real estate, says Lawrence White, professor of economics at New York University. “I think the stimulus bill will have a positive effect on the economy, and a positive effect on the economy is going to have a positive effect on commercial real estate,” says White.

Job growth is a key to recovery, White says. The bill provides for an infusion of spending that will create jobs to modernize the country’s electric grid, clean up nuclear sites, and improve government facilities such as the National Oceanic and Atmospheric Administration research labs, among other properties.

Budgeted items in the 1,073-page federal spending bill range from repairing crumbling infrastructure to boosting police protection in struggling cities. The government will invest in cleaning up former industrial sites and it will also provide tax credits for the purchase of alternative fuels like solar and wind energy. Schools will benefit by receiving overdue repairs, and the Obama administration will offer grants for capital investment in high-speed rail corridors.

“The whole point of the stimulus is to get extra spending and thereby create extra jobs that would not otherwise be created,” White says. Job creation, in turn, could have a beneficial effect on the occupancy of office buildings and on development in the retail sector, which has slumped along with the economy.

Other aspects of the newly approved plan could also help the commercial real estate industry, says Farris of Clemson.

For instance, commercial growth could accompany infrastructure projects targeted in the stimulus budget, he says. “Commercial development depends on good infrastructure.” But commercial growth also relies on lenders’ willingness to offer loans for development, Farris cautions. “They’re hesitant now because they are not sure where things are headed.”

Turning the economy around won’t be easy, adds Farris. The retraction in the economy has caused an increase in inventory of both residential and commercial properties; many companies have laid off workers, bringing the national unemployment rate to 7.6%. The turnaround will require a change in psychology including consumer sentiment, from negative to positive, Farris says.

“The hope is that the stimulus, including tax reductions as well as the spending programs, will in conjunction with the foreclosure program and another level of the Troubled Asset Relief Program - that all of that will allow us to move forward,” says Farris. “This is a ship at sea that needs to be turned around.”

COMMENTS ON HOUSING AFFORDABILITY AND STABILITY PLAN

The article below offers various expert comments on the new plan announced by the Obama Administration. Some feel that it does not offer any relief to tenants in homes foreclosed while others offer additional opinions.

Newly Unveiled Housing Affordability and Stability Plan Doesn’t Help Renters

Published: February 19, 2009

By Anuradha Kher, Online News Editor, Multi-Housing News Online

Washington, D.C.–President Obama’s newly unveiled $75 billion Housing
Affordability and Stability Plan, which is aimed at avoiding foreclosures, may be the much needed relief for many individuals on the brink of losing their homes.

While it was praised by some housing groups, others said the plan isn’t the best course of action the economy needs right now. Conrad Egan, president and CEO of the National Housing Conference, commended the Administration for its “ambitious multi-pronged approach” to address the foreclosure crisis. He said the plan could likely head off millions of foreclosures.

“In particular, by offering incentives to servicers to lower monthly mortgage payments to a level that homeowners can afford, and allowing others who owe more than their house is worth the ability to refinance, millions of responsible homeowners will have the opportunity to stabilize their families and communities.”

Egan also praised the proposal to ensure the liquidity of Fannie Mae and Freddie Mac. The measures would help build a stronger housing market in the near-term and increase housing affordability in the long-term, he says. “We look forward to working with the Administration and Congress on the implementation of these and other measures that are focused on confronting the nation’s housing crisis,” Egan says.

On the other hand, the National Low Income Housing Coalition (NLIHC), says the plan does not appear to provide relief for renters who are losing their homes because their landlords have been foreclosed upon. “Approximately 40 percent of the households who face eviction because of foreclosure are renters. In most states, renters’ tenancy is terminated automatically at foreclosure of a property. In many states, there is no requirement that tenants even be notified of foreclosure,” NLIHC says in a statement.

The NLIHC and other advocates for low income renters have urged the establishment of federal protections for renters that will require the entity that takes possession of a renter-occupied property at foreclosure to honor the existing lease or provide a minimum of 90 days’ notice for the tenant to vacate the property. “Renters are the least blameworthy of all the victims of the foreclosure crisis,” says NLIHC President Sheila Crowley. “It is unconscionable that someone who has been a lease-abiding tenant, paying the rent on time, be evicted with little or no notice because the landlord has defaulted on the mortgage. It also does not make sense to get rid of a tenant who provides an income stream for the new owner and prevents a property from sitting vacant. An occupied house with a good tenant is far preferable to an unoccupied house for both the new owner and the urrounding neighborhood.”

“We urge Treasury Secretary Geithner to use his authority to require all institutions that receive TARP funds at a minimum to honor the leases of existing tenants in properties they acquire through foreclosure,” Crowley says. “A great deal of harm to innocent families could be prevented if he acted now.”

John Berlau, director of CEI’s Center for Investors and Entrepreneurs believes the plan continues the misguided efforts of the Bush administration and Congress to “keep people in their homes” at all costs. “Such policies only end up disserving taxpayers, the economy and troubled borrowers themselves,” he says. According to Berlau, foreclosures are difficult, but are sometimes the least bad option for an individual borrower. “They allow borrowers to walk away from both the home and the loan, at a cost to their credit rating, but not nearly as big a hit as they would take if they declared a personal bankruptcy,” he says.

“Whatever the cause of the homeowners’ troubles, the focus should not be primarily on keeping people in their homes but on opportunities to improve their economic situation, such as relocating to areas experiencing job growth. If the government wants to spend $75 billion to help troubled homeowners, it would be better off giving a tax holiday to families subject to foreclosure, rather than attempt to stop the foreclosure from occurring that often have unintended consequences,” adds Berlau.

According to him, Democrats and Republicans should focus on the truly “progressive” goal of helping victims of the financial crisis improve their economic situation, rather than ambitious efforts to keep people in their homes that can often lead to negative consequences for taxpayers, mobility in the economy and borrowers themselves.

Meanwhile, the Local Initiatives Support Corp. (LISC) believes this plan will give some homeowners the chance to refinance their mortgages and reduce their payments, and in doing so should offer more certainty to lenders/servicers eager to stabilize their portfolios. “The best news in this package is that we are finally tackling our housing problem straight-on in a thoughtful, serious way,” says Michael Rubinger, president and CEO of the LISC. “This is something we haven’t had thus far, a plan that goes to the root of the current economic crisis.

“Certainly, the President’s proposal cannot alone solve all the financial challenges that we face today. But, it is an important, positive step toward alleviating some of the debilitating pressure facing families and communities in
this environment,” he says.”

SPECIAL REPORT: Fannie, Freddie Provide Reassurances in Face of Impending 2010 Portfolio Cap
Published: February 12, 2009
By Keat Foong, Executive Editor

San Diego - Fannie Mae and Freddie Mac multifamily executives provided assurances with regards to their companies’ abilities to supply continued liquidity to the multifamily market despite mandated portfolio reductions in 2010, during a session at the Mortgage Bankers Association (MBA) multifamily and commercial real estate conference held here this week.

Moderator Shekar Narasimhan, managing partner of Beekman Advisors, asked if Fannie Mae’s and Freddie Mac’s appetites for multifamily financing will decline when the portfolio cap is imposed and what actions might the agencies take. Currently, the two agencies are said to be responsible for more than 90 percent of the multifamily financing volume, effectively supporting financing for the sector.

Michael May, Freddie Mac senior vice president, multifamily sourcing, said that of Freddie Mac’s $850 billion portfolio, $600 billion is in securities and Freddie Mac has the ability to trade off those securities to make room in its portfolio.

He said that, additionally, a certain amount of Freddie Mac’s single-family loans are prepaid every month, and it needs only, for example, two months of the prepayment to generate a certain amount of additional capital for lending. May also noted that Freddie Mac has the ability to issue markets executions.

In the future, Freddie Mac can place the loans through a variety of ways including portfolio, securitization or capital markets executions and that he “[does] not see a problem.”

Fannie Mae’s senior vice president, multifamily, Phillip Weber said the agency’s top priority is to broaden the base of investors for its DUS MBS securitization program. This way, more of its loans can be securitized rather than kept in portfolio, and thus not be subject to the portfolio limits.

Weber said the Federal Reserve or Treasury could purchase its debt or mortgage backed securities, but “we won’t wait for them to make that decision.” Weber said that a lot of securities have already been traded to third-party investors. He said Fannie Mae has seen encouraging signs of investor interest as the markets continue to normalize.

Many observers and other analysts have expressed concern in recent months about the
number of commercial loans (including those on apartments) would be coming due and
wound need refinancing in the next year or so. Some of these observers opined that
many of these owners would not be able to successfully refinance in a market with
much more stringent underwriting standards than those that existed a few years ago
when the loans were originated. The report by the Mortgage Bankers Association,
summarized below, finds that the number of loans which might experience difficulty
is much smaller than others had estimated earlier.

MBA Finds Short-Term Floating-Rate Loans Top 2009 Maturities

Feb 10, 2009 By: Suzann D. Silverman, Editor-in-Chief, COMMERCIAL PROPERTY NEWS

The Mortgage Bankers Association’s analysis of loan maturity volumes has determined
that while concerns about a large volume of loans maturing this year are valid, the
majority of those loans are short-term floating-rate CMBS and mortgages held by
credit companies, warehouse facilities and other investors. Other loans, including
fixed-rate CMBS, mortgages held by life companies and multi-family mortgages held
or guaranteed by the general-services enterprises are in the minority.
Indeed, of the $171 billion, or 11 percent of non-bank commercial and multi-family
mortgages coming due in 2009, just $19 billion are fixed-rate CMBS, noted MBA vice
president of commercial real estate research Jamie Woodwell during a press
conference at the MBA’s Commercial Real Estate Finance/Multifamily Housing

Convention & Expo yesterday. About $8 billion are GSE loans and about $17 billion
are held by life companies versus $31 billion in floating-rate CMBS.
In addition, given the nature of these short-term floating-rate loans, many have
one-year extension options, noted Jan Sternin, senior vice president of
commercial/multifamily. Even those come with challenges in the form of requirements
that must be met, such as covenants and cash flow, and eventually they will come to
the end of their extension options, so there is still cause for concern. But the
good news is that they do make up a minority of outstanding loans.

Next year, the total coming due drops to $120 billion, with about $115 billion due
in 2011.

MULTIFAMILY EXECUTIVE MAGAZINE reported in January that the percentage of people
moving out of apartments to buy houses had fallen to an al-time low. This is good
news for owners of rental housing since it will support lower vacancies in rental
units. Rental housing continues to do well in most markets in the U.S.

GOOD NEWS FOR RENTAL HOUSING: REITs see record lows in flight to home ownership.

Source: MULTIFAMILY EXECUTIVE MAGAZINE - January 1, 2009 - By Les Shaver

Multifamily Reits had some good news in the third quarter of 2008: more renters than
ever are staying in their units.

Camden Property Trust, a Houston-based REIT, saw its move-outs for home purchases
fall to an all-time low of 13.6 percent, after peaking in 2004 at 24 percent. UDR,
a Highlands Ranch, Colo.-based REIT, saw its move-outs drop from 15.5 percent in
the same period last year to 13.1 percent this year.

“Homeownership is at historical lows,” says Christopher Wimmer, a vice president
and senior analyst for New York-based Moody’s Investors Service. “People are
worried about the economy and their jobs, and they don’t see [buying a home] as a
good idea at this point.”

AvalonBay Communities, a REIT based in Alexandria, Va., saw fewer than 20 percent
of its residents move out to buy homes. That’s low for the luxury operator.
Meanwhile, Home Properties, a REIT based in Rochester, N.Y., that has lower-priced
apartments, saw only 12.4 percent of its renters leave to buy homes. “These are the
lowest numbers we’ve seen in three years,” says Charis W. Warshof, Home’s vice
president of investor relations.

As layoffs pile up, most people guess that keeping renters disinclined to buy will
not off set increasing unemployment. “We do expect 2009 to be a challenging year,”
says David J. Neither-cut, president and CEO of Chicago-based Equity Residential,
which saw its move-out rates fall to 5 percent.

This article discusses the need for sufficient multifamily property financing to allow the multi-family sector to continue to meet the needs of tenants in the future. Since the GSE’s (Fannie Mae and Freddie Mac) provide much of the financing for this sector it is important for the government not to cut back the size of these entities and reduce the availability of funds for this very important sector of the housing market.

Harvard University, NMHC Paper Prompts Government to Look at Multi Family Financing Issue Closely

January 28, 2009 By Anuradha Kher, Online News Editor, Multi-Housing News

Washington, D.C.–A new policy paper issued by Harvard University’s Joint Center for Housing Studies with support from the National Multi Housing Council (NMHC), is urging policymakers to recognize the important differences between single-family and multifamily financing and take steps to ensure an adequate supply of capital to the multifamily sector during and after the current economic crisis.

Titled “Meeting Multifamily Housing Finance Needs During and After the Credit Crisis”, the paper details the importance of apartments and points to a possible liquidity crisis that could seriously impair the sector.

If regulators’ mandated reductions in the GSEs’ (Government Sponsored Enterprises) portfolios take place next year as scheduled without a substitute liquidity backstop in place, there could be critical housing shortages in the rental market. The paper argues this will happen because unlike single-family loans, which tend to be sold as securities, the GSEs hold most multifamily loans in their portfolios as investments.

“Most of the attention paid to the mortgage crisis has been on how to reform the single-family finance system, but the apartment sector relies on the same federal institutions and agencies - Fannie Mae, Freddie Mac and the Federal Housing Administration - to ensure liquidity,” says Nicolas P. Retsinas, director of the Harvard Joint Center and a former FHA Commissioner.

“To avoid unintended adverse consequences in our rental markets, lawmakers need to understand the differences between the two sectors as they undertake long-term GSE reforms,” he adds.

The paper urges that planning for these reforms should take place now so that if the anticipated GSE portfolio reductions take place, a liquidity substitute can be put in place.

“The good news is that the multifamily story is very different from the single-family story,” says Doug Bibby, NMHC president. “Multifamily loan performance remains quite strong and underwriting standards have remained prudent.”

America will increasingly rely on rental apartments to house our citizens as the largest generation of children under the age of 20 in the history of the U.S. reaches adulthood by 2020, the number of seniors begins to skyrocket, mortgage credit standards tighten and demand for affordable housing grows, according to Bibby.

But the poor performance of single-family subprime loans has resulted in the credit crisis, which threatens the multifamily sector’s ability to meet this need.