This perplexes me. Real Estate Roundtable CEO Jeffrey D. DeBoer wrote an op-ed in the Wall Street Journal in favor of the bailout. In the article, the numbers that continue to indicate microscopic defaults in commercial mortgage-backed securities (CMBS) pools are invoked, yet the article still pleads that without the bailout, commercial real estate will suffer. (Incidentally, it appears CMBS will be eligible assets for the government to purchase if you read the text of the act.)
Today, debt on office buildings, shopping malls, hotels and apartment complexes continue to perform well. The default rate for commercial mortgage-backed securities (CMBS) loans stands at just 0.47%, while commercial mortgages in life insurance company portfolios have a default rate of just .03%.Nevertheless, the $200 billion annual CMBS market is now dead in the water. Credit to the sector from other sources has almost completely stalled.
In short, the life line of the real estate industry, and indeed, job-creating businesses across America, has been cut. For construction workers, this means delayed projects and layoffs. For property owners, and for Main Street, this means property values are at risk of a free fall. For state and local governments, it means less revenue from commercial property taxes and an even tighter budget crunch. What happened to values in the residential market could very well happen on the commercial side -- something which we can take steps to prevent.
If CMBS are, at their core, good assets and commercial real estate is an "island of stability" as DeBoer argues, why does commercial real estate need the bailout? If CMBS are strong, when the market calms, investors will once again invest in the bonds, right? Is CMBS "dead in the water", as DeBoer writes? Why does commercial real estate need a bailout of CMBS pools are not experiencing huge defaults?
For the past 12 months, the majority of people within the commercial real estate industry have told us at Retail Traffic over and over that commercial real estate is not the same as residential real estate and that CMBS are stronger than RMBS. In RMBS not every mortgage is examined. That's one reason so many toxic loans made it into highly-rated pools. In CMBS the rating agencies do look at every loan. People have been willing to admit that the industry got too frothy and there is concern about some of the loans done in 2006 and 2007. Yet overall we hear over and over and commercial real estate is fundamentally strong.
When we've raised questions or concerns, we've been told that we're being too negative and that we're spreading panic by even questioning the solidity of the industry. We've been told that commercial real estate is a casualty in the widespread fear about real estate. And we've been told that in the end the strong fundamentals will mean that commercial real estate bounces back in three months or six months. I can see the argument that everything will be at risk if the financial system is not stabilized. Obviously the banking system needs to be dealt with. But that doesn't mean the bailout in its current form is the right package. Over 190 economists are circulating a letter opposing the bailout and arguing that the way it is structured will not be effective.
So if all that's true, why does the commercial real estate industry support the bailout as its currently structured? The idea of the bailout is to remove toxic assets from bank balance sheets. If CMBS aren't toxic, why should the government buy them?
So which is it? Is commercial real estate healthy or does it need the bailout?