VOL. 123 | NO. 42 | Friday, February 29, 2008
Congress Urged to Boost Investor Confidence Before Housing Slump Fallout Goes Commercial
By DAN CATERINICCHIA | AP Business Writer
WASHINGTON (AP) - To insulate commercial real estate from a still-crumbling housing market, investors need a confidence boost and Congress should help give it, industry analysts and executives told lawmakers Thursday.
The fundamental metrics of the commercial real estate market - vacancy rates, net operating income and capital available for investment - remain strong. But the erosion of credit has hurt the market for apartment buildings, office towers and retail space.
Banks - faced with multibillion-dollar losses from bad bets on mortgage-backed bonds - lend less and have tightened the terms of the loans they do provide.
"Nobody has trust in the banking system," said Jeffrey Schwartz, chairman and chief executive of industrial real estate investment trust ProLogis told the Senate Finance Committee. "There's no trust in (commercial mortgage-backed securities) markets."
The bond insurance industry also has suffered under the mortgage crisis and the role of credit-rating agencies has been criticized by both lawmakers and industry executives.
Schwartz and others said the lack of cash was the biggest issue hampering commercial real estate, but urged Congress to avoid any knee-jerk regulatory or tax changes. One potential fix would be having the government step into the area where credit-rating agencies faltered.
Lawrence Lindsey, former director of the National Economic Council at the White House and a governor of the Federal Reserve System from 1991 to 1997, advocates establishing a federal certification board for mortgage-backed securities to "take up the job that ratings agencies failed in."
The board would certify, for a fee, that mortgages represented in the security meet certain documentation and financial standards but would not be a federal guarantee of the security or mortgage portfolio, said Lindsey, who now heads his own economic advisory firm in Washington.
"There's no trust in the letters AAA anymore," he told lawmakers.
Credit rating agency Moody's Investors Service earlier this month said the performance of commercial mortgage-backed securities could be challenged this year by a weakening economy and uneasy financial markets. Securities volume in 2008 could fall below $100 billion from the $230 billion recorded last year and tighter lending could cause commercial real estate prices to drop between 12 percent and 17 percent, Moody's said.
Prices and demand for office buildings, malls and warehouses are falling with no signs of stopping soon, according to a report released this week by real-estate research firm Real Capital Analytics.
Sales of significant apartment properties topped $3.5 billion in January, the lowest monthly volume since early 2004, while sales of industrial properties fell below $2 billion for the first time in three years. About $4.3 billion of significant office properties closed in January and retail property sales hit $2.2 billion, both of which were the lowest levels in four years.
"With consumer spending falling, compounded by several bankruptcies of high-profile retailers, retail properties are the least popular of the major commercial property types," according to the report from New York-based Real Capital Analytics.
Still, commercial real estate so far has stayed out of crisis territory. Delinquency rates on commercial mortgages remain low and are less risky than residential loans. Also, fewer commercial mortgages are sliced up and sold to investors as securities when compared with subprime loans, so losses on them can be recognized more slowly by banks and other lenders.
Back on the housing side, the National Association of Home Builders called for a second economic stimulus package highlighted by a temporary tax credit for first-time home buyers. The tax credit, the group says, would get on-the-fence buyers to act and unclog inventory gluts.
Such a credit topped the group's wish list, which also includes expanding the carryback of net operating losses' deductions to five years. Under the current carryback code, a company can only claim refunds on taxes paid on profits in the past two years. But two years ago, home builders were already losing money, said David Seiders, chief economist at NAHB. Builders want the carryback to reach back into profitable years.
The association earlier this month cut off all contributions to Congressional office seekers "until further notice" because of its frustration with federal inactivity aimed solely at the housing crisis.
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