You can also find out more about the A-Team here. slow-motion crisis The commercial real estate The market is experiencing a double blow of lower demand and higher interest rates. office space Following the Covid-19 Pandemic.
John Fish who was the chairman of Boston’s Federal Reserve Bank, former chair of its board, and head of Suffolk Construction, as well as the Real Estate Roundtable thought tank, has joined the team. What is Up? The podcast will discuss issues that affect the sector.
The following are a selection of highlights, edited and condensed to make it easier to understand. Click here You can listen to the entire podcast.
Q. Can you talk to us about why this rise in interest rates that we’ve experienced is so dangerous to this sector?
A. You can see a lot of buildings in New York City. There are almost 100 million square feet. vacant office spaces. It’s staggering. And you say to yourself, well, right now we’re in a situation where those buildings are about 45%, 55%, 65% occupied, depending where they are. The cost to sustain these buildings suddenly doubled. So you’ve got a double whammy. You’ve got occupancy down, so the value is down, there’s less income coming in, and the cost of capital has gone up exponentially. So you’ve got a situation where timing has really impacted the development industry substantially.
Capital markets across the country have been frozen. And the reason why they’ve frozen is because nobody understands value. We can’t evaluate price discovery because very few assets have traded during this period of time. There is no bottom. Therefore, until we achieve some sense of price discovery, we’ll never work ourselves through that.
The light at end of tunnel, as I see it, came a few months ago in June. That was when OCC, FDIC and other federal agencies provided policy guidance The industry will benefit from this. This policy direction is important to me for two reasons. One, it shows the government with a sense of leadership on this issue because it’s this issue that people don’t want to touch because it really can be carcinogenic at the end of the day. This also gives a feeling of support and direction to the lending community as well as the borrowers. By doing so, the result is clarity.
Basically what they’re saying is similar to past troubled-debt restructuring programs. They’re saying, listen, any asset out there where you’ve got a qualified borrower and you’ve got a quality asset, we will allow you to work with that borrower to ensure you can re-create the value that was once in that asset itself. And we’ll give you an 18- to 36-month extension, basically ‘pretend and extend.’ What is the best way to get there? what happened in 2009It was a proposal for long-term guidance and had a significant impact on SIFIs. This policy direction really is focused on the regional banking system. Why I say this is that right now, the SIFIs don’t have any real Big Book of real estate Debt is probably lower than 7% or 8%. The regional banks are currently holding over 30% to 35% of the books, and in some cases even more. real estate. This guidance allowed at least good assets to be evaluated and good borrowers to have a chance at the end.
The answer is Q. “extend and pretend” Idea seems to be a term that is used to denigrate this type guidance provided by the Fed or to refer to this approach for solving this issue. Is that the right way of thinking about this? What do you think? “extend and pretend” Is this the only way we can get out of our mess?
Let me tell you something: A well-known finance guru once said that the impact of this issue on the global economy was minimal. And I’m not sure that’s the case. As I reflect on this, the effects on the regional bank system are staggering. We saw Silicon Valley Bank collapse, Signature Bank survive, First Republic fail. Unintended consequences can be catastrophic if there is a major problem within the regional bank system. What happens is, in addition to this, when real-estate values go down? 70% of revenue for cities in America comes from real estate. All of a suddenly, you lower these buildings and place them in foreclosure. Financial spigots stop flowing, correct? Tax revenues drop suddenly. Well, what happens is you talk about firemen, policemen and teachers in Main Street, USA, and at the end of the day, we’ve never gone through something as tumultuous as this. And we have to be very, very cautious that we don’t tip over the building that we think is really stable.