Commercial Real Estate: The Danger of Fighting the Last War

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According to “Fighting the Last War,” the latest podcast produced by John B. Levy & Company (available online at http://www.jblevyco.com), the market of 2009 is dramatically different from the foreclose-and-dispose days of 1990, 1991, and 1992. Because of this, commercial real estate investors who make decisions today based on the last war are pursuing a dangerous strategy.

". . .a collapse in real estate equity values won't benefit anyone."

As embattled industries seek ways to regain their equilibrium in today’s struggling economy, more than a few investors in the commercial real estate sector have turned their attention to the recession of the early 1990s, thinking that today’s market is a repeat of what happened nearly two decades ago. According to “Fighting the Last War,” the latest podcast produced by John B. Levy & Company (available online at http://www.jblevyco.com), the market of 2009 is dramatically different from the foreclose-and-dispose days of 1990, 1991, and 1992. Because of this, commercial real estate investors who make decisions today based on the last war are pursuing a dangerous strategy.

“A lot of people in the commercial real estate industry believe we’re seeing a repetition of the early ‘90s,” says John Levy, founder of John B. Levy & Company. “They’re waiting for the proverbial blood in the streets . . . a return to the days when the RTC bought, foreclosed on, and sold assets by the pound. I hate to say it, but that’s not where we are today.”

For Levy, the difference between then and now is dramatic. While the collapse of one sector of the banking system (the savings and loan industry) in the early 1990s left investors in a state of shock and awe, today’s recession has been marked by the near meltdown of the entire banking system. Over the past couple years, investors have seen AIG, a triple-A rated company, on the brink of bankruptcy; they watched the rescue of Fannie Mae and Freddie Mac; they witnessed the fall of Lehman Brothers and Bear Stearns. Today’s recession is global and severe, and it has touched not only commercial real estate, but investments and companies across the board.

“Some people point to real estate and say ‘that’s what caused today’s recession,’” says Levy, “but that’s not completely true. Single family real estate? Yes, but not commercial. We’re somewhat like a snake going through a dip. The economy may be heading up, but commercial real estate is at the tail of this recession, and it’s quite possible for it to still be going down before heading up.”

With leverage down and promising to stay that way indefinitely, the market clearly needs more equity. But where that comes from is a crucial concern. Levy thinks institutions will eventually provide equity once they recognize that the pricing they are now getting has reached the bottom or is trending up. In the meantime, equity will likely come from high net worth individuals and family offices, even endowments, because these sources have a longer-term view of real estate.

The economy in general and commercial real estate in particular will also reflect the impact of a new policy statement from the FDIC. Whether that impact is positive or negative depends on one’s perspective. On the positive side, banks will not have to establish extreme reserves for bad loans. But on the negative side, investors will not see real estate priced as it was in the RTC days of the early 1990s because there is no pressure to liquidate assets.

“With no pressure to liquidate assets, it might take a long time to get back to equilibrium pricing,” says Levy. “Is this good news? Probably, because a collapse in real estate equity values won’t benefit anyone. But if you’re waiting for blood-in-the-street pricing, it could be bad news.”

Firm Background
John B. Levy & Company, Inc. is a real estate investment-banking firm headquartered in Richmond, Virginia. Since John Levy founded the company in 1995, the firm has structured over $3.5 billion in financing for developers and owners of commercial and multi-family projects nationwide, often investing its own proprietary funds into transactions with its clients.

Mr. Levy is an expert on commercial real estate financing and the effects of interest rates on commercial real estate markets. He is the originator and author of the Barron’s/John B. Levy & Company National Mortgage Survey, which Barron’s published for 23 years, and co-creator of The Giliberto-Levy Commercial Mortgage Performance Index (sm), the first and pre-eminent index to measure and analyze the performance of investments in the commercial mortgage industry. Additionally, he is a member of the Board of Directors of Anthracite Capital Inc. (NYSE: AHR), a New York Stock Exchange REIT managed by BlackRock, Inc and a former director of Value Property Trust.

A seasoned speaker, Mr. Levy has presented nationwide to major real estate associations and key industry groups, including the Mortgage Bankers Association and the Urban Land Institute. He has also appeared on Bloomberg and CNBC. Most recently, Mr. Levy appeared as a guest commentator on FoxBusiness.com and FoxNews.com.

For more information about John B. Levy & Company, please visit the firm’s website at http://www.jblevyco.com or call Andrew Little at 804-644-2000, extension 260.

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