Commercial Real Estate Finance

Archive for February, 2009

TARP. The acronym stands for Troubled Asset Relief Program. The creative wordsmith who came up with it also likely recognized the double entendre of the name, hoping the program would help cover up (like a tarp) the financial mess banks have gotten themselves into by being careless. Of course there’s only one problem. All banks are applying for federal TARP money, and barely any of the major banks are using it to lend to new customers, as the government had designed.

“The top 13 banks in this country are not recycling that TARP money,” says Wayne Brandt, managing director of Buchanan Street Partners. “Lending has dropped at all the US banks.” He adds, “The banks are scared. They don’t know how to price these toxic securities. They’re hoarding (the TARP money) and waiting for the storm to pass.”

Why aren’t they lending, you ask? Maybe its because so many of them got burned by bad loans. It’s hard to get back on the horse right after you’ve been bucked off. Or maybe, it has a little something to due with the fact that over $160 billion dollars worth of debt affixed to commercial real estate is coming due in 2009, with almost another $400 billion or so to come in the two years to follow. The CMBS market, which financed over $230 billion in commercial property debt in 2007 and even $30 billion in the face of market turmoil in 2008 might be as dormant as Mount Vesuvius in the foreseeable future.

And if you weren’t paying attention, what all of that means is “there continues to be no capital in the system that’s readily available,” says Brandt, who predicts that about half the loans due out there will be extended, some will be reworked through a traditional loan workouts and some, an as of yet to be determined percentage, will be closed upon—and very few of the latter will be in the position to obtain adequate refinancing.

“Everybody knows this recession will get worse,” he says. That means the banks will lend, but only to their best customers. In affect, Brandt says, “they will make new loans to preserve and protect the balance sheets of those who have been loyal, well-capitalized borrowers with strong balance sheets with decades of experience and a track record.”

He adds, “the global system is deleveraging, and this deleveraging means this recession is going to last longer than most Americans expect.”

To make matters worse for property owners, other means of capital aren’t promising either. Life companies and private equity companies can afford to be picky, and are more likely to go after the most stable asset classes like student housing and healthcare, given their druthers (of which they have plenty these days).

While TARP hasn’t had a chance to fully play out yet, and the Obama administration is in the midst of structuring how they will spread their $350 billion dollars, bigger commercial banks are not likely to have a quick change of heart. The vast majority got burned on bad loans, and few, if any are comfortable gauging what appropriate spreads should be in today’s environment. The wounds commercial banks are currently licking will heal with time, and the lending freeze will eventually ease. Its just likely to be later rather than sooner.

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A member of the Llenrock team visited Dubai in December 2008 and had the following to say about his experience there:

Dubai… Where else can you find bizarre palm-shaped archipelagos, space-age skyscrapers, air-conditioned bus stops, man-made islands designed to resemble the world from space, and the tallest man-made structure in human history? Oh, and if that doesn’t do it for you, you can go sand-boarding down desert dunes in the AM and then ski on the indoor slope at what used to be the world’s largest mall after brunch at the world’s only ‘seven-star’ hotel. That aforementioned mall is no longer the biggest because the Dubai Mall, three times larger, just opened this year. Sheik Mohammed, the $10B man and ruler of Dubai, had also privately confided to about a dozen different media groups that this “was only the beginning” (Not surprisingly, he has been MIA since oil dropped to $30 a barrel and the ensuing economic crisis).

The little pearl-fishing town turned major metropolis in just a few decades is still chugging along…at least with optimism if not actual construction. The list of future projects ranges from the pretty cool to the downright ridiculous and include an all-underwater hotel (with no construction start in sight), Dubai World – advertised as the largest mega-resort on earth and slated to open around 2020, and the Waterfront by Nakheel, a development marketed as twice the size of Hong Kong.

So is it real or all talk?

From conversations with a senior executive at Nakheel, and other local developers, I got the sense that the overwhelming majority of these projects have been delayed if not shelved. Emaar, one of the world’s largest real estate developers, saw its stock plummet by over 90%. It’s hard to justify an underwater hotel when that happens. But then, few expected the world to come to a screeching halt. And for any who think the impact of the US crisis on the global economy is being exaggerated, look no further than the hotel I stayed in. After a few days at the Ibis World Trade Center hotel, one of the best values around dharam for dharam, I decided to explore the market and called around. Every hotel was not just bleeding, they were hemorrhaging. I ended up negotiating a stay for a friend and myself at the Marine Beach Resort and Spa, a five-star luxury resort with private beach on the gulf, meandering gardens, and fourteen F&B outlets for 600 dharams a night. It retails for 1500, especially in December — Dubai’s high season — but occupancy was a dismal 39%.

Despite optimistic predictions by the Khaleej Times, a partially state-sponsored local newspaper, we do not believe the real estate market will bounce back in force by 2010. Rather, we are more inclined to believe that the pain felt in Dubai’s capital markets has only begun - and that it will be a long time coming before it returns to pre-bust (2006) levels.

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