It is Official- We are in a recession.

December 2, 2008

by Erika Murphy of

WASHINGTON, DC-Eighteen months into a credit freeze, the real estate industry hardly needs an official proclamation that the economy has gone into recession. Still, though, CRE–along with the rest of the nation–got one yesterday when the National Bureau of Economic Research–a private body whose sole mission is to call both the beginning and the end of a recession–announced the downturn’s official arrival as last December. Wall Street, as it has regularly done for the last two months or so, responded with a huge–in this case 679-point–drop.

The current downturn does not meet the official definition of a recession–two consecutive quarters of declining growth. GDP fell 0.5% in the third quarter this year; in Q2, GDP growth registered 2.8%. Still, though, the NBER noted that the economy met another definition of a recession: “a significant decline in economic activity spread across the economy, lasting more than a few months.”

The commercial real estate industry can attest first hand to that–it has been watching its residential counterpart struggle with both sales and financing for the last two years. Indeed, the widespread and–in most cases, careless–securitization of subprime loans is one of the origins of the crisis. CRE began to be directly impacted last August when the CMBS markets shut down. It also received a wake-up call in March when Bear Sterns was acquired by JP Morgan Chase in a Treasury Department-engineered buyout.

With this hard-earned history behind it, news of an official recession “is merely a recognition of what everyone in the commercial real estate industry has known for some time,” John St. Jeanos–a New York-based commercial real estate attorney at Herrick, Feinstein LLP, with a sub-specialty in finance–tells “This is simply the retrospective interpretation of the empirical evidence that is needed to make official what has been patently obvious for many months.”

“The fact that we are in a recession is nothing more than a confirmation of what the commercial real estate industry has known and how the industry has acted for most of 2008,” Barbara Trachtenberg, a partner in DLA Piper’s Real Estate practice in Boston and president-elect of NEWIRE (New England Women in Real Estate), tells

She points out, “The only part of this information that is new is that it provides a starting point for the recession–December, 2007. For optimists using history as their guide, that means the end is near–probably within six months, which means that we have passed the halfway point. For others who take the view that this will be a longer than average recession, it simply means that we are almost one year through the pain.”

More important to the CRE industry is not the question of what, but when–as in: When will the credit markets unlock?

For his part, Jeanos doesn’t “envision much of an effect on liquidity in the commercial real estate market, nor do the majority of the firm’s developer clients, whom I counsel on finance issues. An aura of impending recession, or a real-time sense that we are in a recession, affects the credit markets far more than an official proclamation of the obvious: that we have been in an economic recession for months now.”

Trachtenberg says she doubts that lenders will suddenly become optimists, assume that the end of the recession is near and start the dollars flowing again. “However, I also don’t think that this news is going to significantly tighten underwriting standards or significantly reduce the amount of deal flow from its current levels. My view is that the existence of the recession has already been taken into account.” Indeed, the CRE industry has absorbed far more in the last few months than the mere fact of a recession. For example:

  • Interest rate cuts are a placebo, at best, for CRE financing. When the official news came out, Federal Reserve Chairman Ben Bernanke all but promised to continue to cut interest rates–even while noting at the same time that they have only a limited impact. As recent history would suggest, he is right.
  • Currently, the benchmark interest rate is at a historic 1% low. As late as September it has been at 2% for a while, following a series of targeted cuts that began last September. Each time the Fed made a decision–or not–to cut rates, the CRE industry shrugged. That is because this rate doesn’t impact mortgage rates or long-term financing. That is why the Fed has said it is considering purchasing Treasury bonds on the open market–which could well bring down costs.
  • Erratic government direction may not be helpful. If the Fed does make such a move, it would be one of the many innovative–as well as misdirected–measures the government has taken in the last few months. Beginning with the dramatic claims of impending economic disaster officials made in order to push the Troubled Asset Relief Program through Congress this fall, to the bailout of AIG to the decision to exclude illiquid mortgage-based assets from TARP, the government has zigged and zagged as it searched for a solution.
    In the Fed’s defense, the current woes are almost unprecedented; it’s not as though policymakers can dust off the recession manual to find a formula that works. Still, though, some in the industry are beginning to wonder if limited action is better than erratic action.
    “This back and forth by government has been worse than not doing anything,” Edward J. Grebeck, CEO of Stamford, CT-based Tempus Advisors, a debt strategist and adjunct lecturer at NYU, tells Furthermore, he adds, many of the initiatives the government has launched have not worked. The decision to inject $250 billion of capital into the banking system, for instance, has not realized its intended goal of prompting banks to begin lending again.
  • It’s not just about liquidity. What happened, Grebeck says, is that the government misread the problem as a liquidity issue. And while liquidity is all but gone from the real estate capital markets, at heart the real problem is that so many assets have been mis-valued. “I don’t know what the government can do about that. That is something that is going to have to work out through the system.”
  • Financing is still out there. Despite the environment the CRE industry has plugged along. Many deals that once would have gotten financing are now laying by the wayside. Still, though, financing is available for transactions with the strong sponsors in strong markets. Also some sources have not dried up at all. Multifamily financing has traditionally been dependent on Fannie Mae and Freddie Mac. Although the GSEs are clearly beleaguered–they have not yet failed to come through for multifamily borrowers. One example is Milestone Multifamily Investors LP–a joint venture between the Milestone Group and Invesco Real Estate, which just received a $102.9-million addition to an in-place credit facility from Fannie Mae.
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