Many in commercial real estate watched the massive bailouts of residential loans and other “strategic” US companies such as financial institutions and auto manufacturers with a sense of disbelief. Commercial real estate types have known for months that billions in debt in their industry are at risk as well. According to a Wall Street Journal report from October of last year banking regulators “are girding for a rerun of the housing-related losses now slamming thousands of banks that failed to set aside enough capital.”
Finally, last week a US Congressional Oversight Panel issued a 184 page report entitled Commercial Real Estate Losses and the Risk to Financial Stability.
It’s nice to know that Congress is at least paying attention.
Some insights from the report:
“A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of every American.” Also, “…disproportionate exposure to commercial real estate capital creates negative feedback loops that suppresses economic recovery.”
Perhaps most interesting to tenants in commercial space, who, after all, are paying for the party here:
“Fewer loans to small business hamper employment growth, which could prolong commercial real estate problems by contributing to higher vacancy and lower cash flows.”
Couldn’t have said it better myself.
This report is in part the result of public hearing held in Atlanta in late January with many leaders from the commercial real estate community in attendance. According to the National Real Estate Investor, Atlanta has seen property values fall by 50% from their peak in 2007. In many ways, Atlanta is the poster child for commercial real estate woes nationwide. Partially as a result of Atlanta’s problems, bank failures have happened at a stunning rate in the State of Georgia with more on the horizon.
It is refreshing to know that Congress is finally paying attention to commercial real estate, and in fact the Congressional report on the subject is the first sign of sanity in the industry for sometime.
However, as we’ve written in this blog before the key to solving the “real estate problem” long term is true job growth. In most cases, business can’t grow without financing and it feels as if businesses are being unfairly penalized in the commercial real estate financing world. We feel like small business financing has gotten caught in the lint filter of the economy. Essentially credit needed to finance business growth appears to be hamstrung by regulators dealing with commercial real estate problems.
So, when you as a commercial real estate expert on the tenant side explain the “problem” in our area, you might remind others that growing prospering US businesses solve problems. Let’s help the public and elected officials understand the issues. Anything Congress or regulators can do to help businesses grow is better than yet another bail out.