Paralyzed Credit Markets, Property Value Expected to Drop Further

WASHINGTON, Nov. 13 /PRNewswire-USNewswire/ -- Senior real estate executives believe that dysfunctional U.S. financial markets and the broad economic downturn have paralyzed the income-producing real estate sector -- encompassing office buildings, shopping malls, warehouses, hotels, and apartment buildings -- according to The Real Estate Roundtable Sentiment Survey for 4th quarter 2008.

"Real estate is now experiencing a seismic liquidity shock. Even though loan delinquencies in the sector are very low, the ongoing lack of credit and drop in asset values has paralyzed the market," said Roundtable President and CEO Jeffrey D. DeBoer. "It is now clear that unless bold policy actions are taken to specifically assist commercial real estate markets, this problem will intensify to mammoth proportions."

The 4Q 2008 Sentiment Survey shows senior executives' confidence in the real estate market has deteriorated below last quarter's depressed levels. Ninety percent of respondents believe conditions are worse, and over half stated that conditions are "much worse" than 12 months ago (up from 74% and 28%, respectively, in July). Of all respondents, 39 percent expect real estate market conditions to get worse in 2009, up from 24 percent in the previous quarter.

Respondents also reported that asset prices are continuing to drop, a trend they expect to persist over the coming year. Sixty-eight percent of those surveyed said commercial real estate values will be lower next year, while 27 percent believe they will be "much lower" (up from 49 percent and 5 percent, respectively, from the 3rd quarter).

Nearly all the executives surveyed said access to capital has significantly decreased as debt & equity markets have tightened. Notably, 84 percent said credit availability is "much worse" than it was one year ago. Equity financing conditions are worse as well, but not to the extent seen on the debt side -- 51 percent characterized equity financing as "somewhat worse" than one year ago; only 23 percent said conditions are "much worse." Although there is mild optimism that capital market conditions will improve in 2009, approximately a quarter of those surveyed expect conditions to worsen.

In a letter to President-Elect Obama Nov. 7, DeBoer and Real Estate Roundtable Chairman Christopher Nassetta (Hilton Hotels Corp.) offered congratulations while requesting an opportunity to begin working with Mr. Obama's transition advisors on potential policy solutions for stabilizing the nation's multi-trillion-dollar real estate.

"Our immediate and overriding concern lies with the fact that credit and capital markets are essentially closed for business, particularly for commercial real estate," the letter stated. As a starting point for transforming the nation's outdated financial infrastructure and "advancing a new paradigm for the credit and capital markets of the 21 century," the letter focused on five key policy areas: [View DeBoer in a six-minute video outlining the plan at The Roundtable's website www.rer.org].

1) Getting Banks to Lend

Banks must be encouraged to extend performing loans that are coming due, and to provide credit to job-creating projects capable of beginning development within 90 days.

2) Encouraging Foreign Investment in U.S. Real Estate

Since an IRS ruling issued in June 2007, foreign investment in U.S. real estate has plunged from $25 billion-$50 billion annually to approximately $7 billion. In addition to reversing this ill-advised IRS Notice regarding "FIRPTA" (the Foreign Investment in Real Property Tax Act of 1980), the entire tax system applicable to foreign investment should be reformed.

3) Modifying Accounting Rules Exacerbating the Credit Crisis

"Mark-to-market" accounting rules are exacerbating the credit crisis by causing excessive write-downs of financial assets. The formerly $200 billion commercial mortgage-backed securities (CMBS) market has been frozen since Aug. 2007. Until markets return to normal, a "mark to maturity" or "mark to cash flow" model should be adopted. Additionally, pending consolidation rules proposed by the Financial Accounting Standards Board (FASB) -- applying to institutions that sell part of a loan and retain part -- should be deferred.

4) Creating a New Credit Facility for Commercial Real Estate Debt

Discussions must begin immediately on creating a new facility to meet the very real credit demand of the real estate industry. Such a facility could be modeled along the lines of what the FED has done for money market funds and commercial paper. It could be a GSE-type facility for commercial debt, or modeled along the lines of the covered bond structure that is now used in Europe.

5) Rejecting Tax Policies that Discourage Real Estate Investment

As the tax policy debate heats up next year, policymakers should reject proposals to raise capital gains tax rates or modify the like-kind exchange rules. They should also reject proposals to increase taxes on partnership "carried interest." Each of these ideas would dramatically increase taxes on real estate, discourage risk taking, and favor debt over equity investment. These ideas would be bad policy at any time, but would be disastrous if adopted amid the current market and economic turmoil.

About The Real Estate Roundtable Sentiment Survey

These results represent the third installment of The Real Estate Roundtable Sentiment Survey, which is the industry's most comprehensive measure of leading real estate executives' confidence in financial and real estate markets. The survey, conducted by FPL Advisory Group, captures the perspectives of over 100 senior real estate executives, including CEOs, presidents, board members, and other executives from a broad set of industry sectors including owners and asset managers, financial services firms and operators.

About The Real Estate Roundtable

The Real Estate Roundtable brings together leaders of the nation's publicly-held and privately owned real estate ownership, development, lending and management firms with the leaders of national real estate trade associations to jointly address key national policy issues relating to real estate and the overall economy. Collectively, Roundtable members' portfolios contain over 5 billion square feet of office, retail and industrial properties; over 1.5 million apartment units; and in excess of 300,000 hotel rooms. Participating trade associations represent more than 1 million people involved in virtually every aspect of the real estate business.

SOURCE Real Estate Roundtable