The Credit Mess

Thursday, September 18, 2008

"Timing, timing, timing," NAIOP chief executive David Begelfer sighed yesterday. His couldn't have been better.

On a day when a banner headline in The New York Times said, "Central Banks Inject Cash as Credit Dries Up," NAIOP's well-attended program at the Hyatt Regency Wednesday was: "Reality Check: Putting Today's Credit Crunch into Perspective." You might never have predicted it, but, in spite of all the current bad news, the perspectives were largely positive, from a panel moderated by George Fantini of the investment advisers Fantini & Gorga.

That's because the agenda, set up weeks ago, focused largely on comparisons between today's real estate financial mess and the one in the early 1990s.

Fantini's 31-point matrix comparing conditions then -- measures of economic health, real estate fundamentals, underwriting, interest rates, and capital availability -- with now most certainly favor now over then.

There are lots of "uncertain"s in Fantini's future outlook column, but Michael Sarkozi, managing director of JP Morgan, summed it up: "I don't think things are nearly as bad as they were back in the early '80s and early '90s," when unemployment was 12 percent and the prime rate was around 22.

He said the early '90s saw the most serious downturn in property values in history, a drop of an average of 40 percent -- and no loans made for over a year.

James Kearns, vice president for commercial mortgage of 40|86 Mortgage Capital Inc., was perhaps the most calm and reasurring voice of all. "Today, all four property types are well within balance," he said. In the '90s there was wicked oversupply.

And there's little construction going on, except in a few overheated markets. "If jobs hold up, supply and demand will remain in balance for many years to come."

Mark Weld, managing director of ING Clarion, said as technology has multiplied and the world has shrunk, "Real estate equity is now a global business." It's a liquid environment, "independent of what happens in any specific market."

The East Coast, and a few other pockets, are better off right now than the country in general. "We're not projecting vacancies are going to go out of control," said Sarkozi. "The glut will eventually be absorbed. It's OK."

Cap rates, in the low teens in the early '90s, are about 5.5 percent today. "They're going up," warned Kearns. But no one on the panel predicted a repeat of the 8 percent loan delinquency rate of that earlier period. Today it's about 1 percent.

Some interesting numbers: The insurance companies typically have loaned $40 to $50 billion a year. (They'll do $20 to $25 billion this year.) But securized debt -- the kind that got us in trouble and is now dead in its tracks -- lent $200 billion in 2006. That kind of money didn't even exist in the early '90s.

Once the institutions work off their bad debt, largely from 2006 and 2007, they'll start lending again, Sarkozi said. "It's essential. I'm not sure it's going to return to the same size it was in 2006." Susan Leff, senior vice president at Wells Fargo Bank, said that, just as geography has shrunk with respect to investing, so the sectors -- commercial, residential, industrial -- have merged.

"You cannot really look at these asset classes as separate silos anymore."

Leff said Wells Fargo has capital and is "actively lending" but looking at sponsorship (i.e., customers) very carefully. And it's harder to find lending partners if the bank needs them.

Why did this current collapse occur?

"Securitization," said Leff. "Globalization and greed."

In a personal aside, she said she once left a bank for a job at a firm doing commercialized loans. "I drank the Kool-aid," she said. "I thought commercial banks were over."

Not surprisingly, referring to his own business of commercial mortgage-backed securities, Sarkozi said, "I don't think it's a CMBS problem. The problem was the residential market," where people who shouldn't have taken loans took -- or were sold -- them.

And those packaged loans were sold to investors who shouldn't have bought them too.

"Wall Street got too clever," said Fantini, said Fantini, who has studied these markets for 43 years. "they came up with ways to hide risk. And the rating agencies bought into it."

Fantini said there's "nonsense" from both presidential candidates. "I personally believe nobody has a clue."

The nature of securitized debt will change, some suggested, and some debt/risk will be retained by sellers. So when a hot potato gets passed there will be some consequences all around.

Fantini pondered: If this were a baseball game, which inning are we in? Most in the audience thought the fifth, with a few hands for the seventh.

On the panel, two said sixth, one said the fifth, and Sarkozi said: "The seventh inning -- of a double-header."

Fantini agreed with the fifth inning, but he said there are clouds out there, and it might rain, and the game might be continued.

Personally: Welcome to new NAIOP chief operating officer Melissa Browne, who came over from Colliers/Meredith & Grew.

LET THERE BE TWO

Rudi's Resto+Cafe & Catering, at Rowes Wharf, is expanding to the South End.

The new shop will open at 811 Mass. Ave. on or about Oct. 15.

And the home location, threatened with a move because of rising rents, remains for now. Recommended: classic chicken salad on sourdough bread.



OUT OF THE GROUND

Russia Wharf, one of the most interesting construction sites to watch in the city, is progressing.

The deep slurry concrete walls are in, and construction will begin soon both downward and upward, from a concrete slab on the surface. Six floors down for garage -- hugging the Silver Line tunnel on the northwest corner -- and up 31 floors for the office tower.

Boston Properties Inc. is the owner. Condos are still planned for the lovely building that fronts the Greenway, and there's supposed to be residential where the other two buildings were too.

The facades remain, braced by steel. Wellington Management will occupy most of the new office space, and a plaza will face the Fort Point Channel along Congress Street, next to the InterContinental Hotels' two-acre garden space.

And someday the Congress Street bridge restoration will be done.