"The crash already occurred. It's now an accounting problem"
Is commercial real estate coming back to life, a little?
"You'll hear a lot of people talk about a looming crash. The crash has already occurred," E. Todd Briddell, president of Bank of New York Mellon Corp.'s $3 billion asset Urdang commercial real estate arm in Plymouth Meeting, told me.
"It's now an accounting problem."
Office and warehouse construction may have ground to a halt. But "the market is starting to creep back up," says Richard Ferst, Urdang's newly promoted chief executive.
"You need prices to fall," said Briddell. If banks used to finance, say, a $100 million building with just 15 percent down, but values have fallen, say, 40 percent, and banks now require 40 percent down, "it should be obvious that the risk of refinancing that old $85 million loan, for just $36 million, is quite low." Compared to the original loan.
"But someone has to accept the difference, the $49 million loss," Ferst added. "Should it be the bondholder, or the owner, or the bank? It comes down to an accounting issue."
The Congressional Oversight Committee, a politically mixed group, warned last month that $1.4 trillion of commercial mortgages on office, warehouse, and apartment buildings will expire in the next four years; prices are down an average 40 percent; and banks are going to have to eat a lot of the losses.
"The government is acting very differently from in the last recession," Briddell told me. In the savings and loan crisis of the early 1990s, "there was mass failure of banks, and the Resolution Trust Corp. disposed of them quickly." But this time government agencies "have taken a much more patient approach. Keep interest rates low. Allow them to play games with mark-to-market (loss) accounting... More banks are failing, but the pace is measured," a few each week. The problem is being extended so it won't seem so severe.
"We don't see the market recovering quickly," said Ferst. But the firm stopped investing before the crash, and now it has several hundred million dollars it's using to bargain-hunt -- an office complex in Bethesda, a half-built luxury development in Las Vegas, condos in Boca Raton.