Real Estate News | Commercial Real Estate
CBRE's Raymond Torto Sees Economic Improvement by Year End but Big Problems Still Ahead
By Alex Finkelstein | February 13, 2009 2:19 PM ET
(BOSTON, MA) -- The nation's economy should be improving by the end of this year but serious problems will continue to plague the commercial real estate and financial markets for at least two more years.
That's the feeling of Raymond Torto, Global Chief Economist for CB Richard Ellis Co. and a founding principal of Boston-based Torto Wheaton Research.
Real Estate Channel asked Torto to comment on several current issues facing the real estate and financial markets. Here are his abbreviated comments in question-and-answer format made today in a 15-minute telephone interview:
Q1 - How bad is the economic situation we are in today?
A - Bad. It compares to the Great Depression (of 1929--1940).
Q2 - From chatting with brokers and reading their daily news releases, Real Estate Channel is seeing a smattering of lending activity from community banks and lesser-known lenders, but are you seeing any light in the lending pipeline at your end?
A - I am hearing the same thing. But price and proceeds are always stumbling blocks. For example, where lenders were providing 80 cents on the dollar a year ago, it's 60 cents on the dollar today. Meaning, of course, borrowers need to come up with more of their own money on the front end.
Q3 - Was there anything specific in Treasury Secretary Timothy Geitner's recently announced plan to shore up the financial markets that might give the real estate industry some hope that the lending spigot could open again shortly?
A - Yes, there was. For instance, he said TARP (Troubled Asset Relief Plan) could extend to take in commercial mortgage-backed securities (CMBS). That would help, but keep in mind, securitization is still the issue here. The securitized market made up about 24 percent of all commercial real estate debt. That (volume) is not there anymore. And that is a big hole to fill.
Q4 - If the Treasury's plan to guarantee certain bank loans against default could be implemented quickly, would that be enough to unclog the lending pipeline? Or has that already been proposed and rejected largely by many of the big banks?
A - The guarantee has the potential to unclog the pipeline. This is the model that was used with Citibank. But the Stress Test (that Treasury proposes) could be the key here. The question federal examiners will ask the banks is 'Are You a Zombie or Are You Not.' The test would involve examining a bank's books. If the bank turns out to be a zombie, it will get shut down. If it is not a zombie, it will get help. Treasury will have some political cover on this process. Unfortunately, this process takes time - and most of us don't have the patience at this time.
Q5 - Several industry watchers have suggested Treasury follow the RTC (Resolution Trust Corp.) model used in the 1980s to liquidate assets of many of the country's failed savings and loan associations. Would that model be appropriate with some of today's sick banks? (Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion).
A - Not really, because you must remember, those S&Ls already were dead when the federal government took over (as a U.S.-owned asset management company). They were zombies. In that period, the assets were buildings, things a buyer could see and touch quickly. Today's assets are complicated security assets. That's the big difference. The buyer is buying a piece of paper today, not a building. But there still may be players around who feel they might receive a return of 18 percent from that paper.
Q6 - If you were the Treasury Secretary today and had the $350 billion to allocate in the financial sector, how would you do it? Where would you start?
A - I would do generally what the federal government is already doing. And I would put much emphasis on the government's proposed Stress Test (for banks seeking a government handout). We don't have all of the details yet but I think the Stress Test is a great idea. I would say they are on the right track.
Q7 - Realistically, what time frame does your gut tell you for the capital markets to become stable again? 2010? 2011? 2012?
A - This year. We already are seeing signs. Cisco's $4 billion (bond offering announced Feb. 10). Once stabilized then, how long will it take for the economy to stabilize? Possibly 2010...but that's a tough one (to answer). Unemployment will still be high. But GDP (gross domestic product) should (for the first time in two years) show zero or a little higher by the end of this year.
Q9 - What time frame do you see for the single-family residential mortgage situation to become stable again? 2010? 2011?
A - I think we will have reached bottom by the end of this year. Prices might start to stabilize at that point. But there will still be excess inventory. Plenty of new homes remaining unsold. We may be in a situation comparable to the 1970s when it took about 10 years for the market to come out of its overbuilt situation.
Q10 - With few, if any deals, crossing the desks of many commercial and residential real estate brokers today, what words of wisdom and practical methods of operation could you offer that would motivate them to stay in the real estate business awhile longer in the hope that stabilization is not far down the road?
A - To answer that one, I'm reminded (of a long-forgotten sage who often said, ) 'This, too, will pass.' This is a cash flow situation. There is an over-capacity of agents. Some will have to leave (the real estate business).
Q11 - Do you share Wall Street's current perception that the Treasury and the President have no real idea of how to get their financial stimulus and bank bailout plans in gear, and are just trying out one route after another, in the hope they will land on the right route soon enough?
A - Keep in mind, they are rowing in uncharted waters. But they have some oars in the water already. They are more transparent (with their plans) than the previous administration. They have some of the best minds in the country working on the problems. We will just have to have patience, and that's something most of us don't always have.