Can TALF Save Commercial Real Estate?

NEW YORK ( TheStreet.com) -- In an attempt to bolster the U.S. economy and save the commercial real estate market, the Federal Reserve extended its Term Asset-Backed Securities Loan Facility (TALF) program by three to six months.

The extension is aimed at providing more help for the credit markets and preventing an already battered sector (commercial real estate) from falling even further. Many observers, however, are skeptical that it will work.

On one hand, the program has the potential to generate up to $1 trillion in lending to households and businesses by enabling investors to use program funds to buy new asset-backed securities backed by auto and student loans, credit cards, business equipment and loans guaranteed by the Small Business Administration, as well as commercial real estate debt.

Already, the TALF loans have reduced borrowing costs in some markets. Since the program began in March, the gap, or spread, on top-rated securities backed by consumer loans relative to benchmark interest rates has fallen to 0.60 of a percentage point, and the spread on triple-A-rated debt backed by commercial real estate has dropped 7.2% to 4.6 percentage points more than U.S. Treasuries, according to Barclays Capital.

On the other hand, many believe that consumer spending and confidence is the only thing that will prevent the commercial real estate market from weakening. It is the consumer that drives corporate revenues, which enable companies to prosper and grow. Corporate America will not add additional square footage in times of lean management, even though it may beat Wall Street's profit expectations.

In a nutshell, although TALF has been beneficial and has reduced the cost of borrowing, it is ultimately up to the consumer to determine the fate of commercial real estate.

Following are some equities that could potentially be influenced by the extension of TALF are the following:

Simon Property Group ( SPG): This stock has nearly doubled from a March low of $26.19 to close at $58.12 on Monday.

SPDR Dow Jones REIT ( RWR): Closed at $39.55 on Monday after a March low of $22.97, an increase of 72%.

The Vanguard REIT Index ETF ( VNQ): Up 71% from a March low of $21.15 to close at $36.24 on Monday.

In addition to the previously mentioned factors that will influence the commercial real estate market, there are inherent risks when investing in equities. A good way to mitigate these risks is through the utilization of an exit strategy. According to the latest data from www.SmartStops.net, an upward trend in the aforementioned equities could come to an end at the following price levels: SPG at $56.55; RWR at $38.38; and VNQ at $35.09. Keep in mind that these price levels change as the markets fluctuate and updated data can be accessed at www.SmartStops.net

-- Written by Kevin Grewal in Laguna Niguel, Calif.

Kevin Grewal is an editorial director and analyst at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, he was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.

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