Commercial Real Estate: Then and Now
By Michael Quigley, portfolio manager of Wedgewood Partners, St. Louis.
A
asked commercial real estate stakeholders to compare and contrast the current environment with that of the Resolution Trust Company days (late 1980s through early 1990s). Here is my take:
Commercial real estate is not overbuilt. It is affected by weak demand.
Lenders are working with borrowers to avoid having to take REO (real estate-owned) on the books (forbearance is common) vs. the RTC days, when the government would pressure institutions to resolve CRE issues by pushing foreclosure.
Banks are too weak today to go through the foreclosure process. It looks like regulators are using banks as individual RTCs (funded by the government), rather than the government shutting down the institutions and selling the assets itself.
We have diverse capital bases and complex funding structures -- only a third to one half of capital came from banks during the most recent cycle (2003-08). The rest came from commercial mortgage-backed securities, real estate investment trusts, private equity, etc., so the notion that banks "aren't lending" post-crisis is a misperception, because they weren't really lending before the crisis either.
There is supposedly a ton of opportunistic capital on the sidelines, waiting to get back in.
