Does commercial real estate need a stimulus?

Government stimulus and financial market intervention haven’t been this
aggressive since the Great Depression, and we haven’t seen the last of
it. Government loan facilities established last year are being
modified, and new programs could help jumpstart stalled credit markets.

Government stimulus and initiatives alone won’t fix the
economy, but the multitude of programs should ease the flow of credit,
according to a new report on government intervention from Marcus &
Millichap, “Government intervention, bank stress tests aim to restore confidence
— will measures be enough?”

Marcus &
Millichap’s question draws varied responses. Some believe the proposed
Public-Private Investment Program (PPIP) will help. Others see the
outlook as dim despite the government initiatives. Still others say it
depends.

Even with the stimulus money and government
intervention the outlook remains uncertain, said Robert Simon, a
professor at Cleveland State University specializing in the economics
of commercial real estate.

“Currently there is no more
construction lending going on in South Florida and most banks have let
knowledgeable people go, leading to decline in the relationships that
formerly existed,” Simon said. “Of the stimulus funds available for
commercial lending, more than likely, not a lot of it will end up in
South Florida.”

Refinancing will be the dominant activity,
leaving little for construction — which is how jobs are created.
Without job creation in commercial construction the market will skitter
along on or near the bottom. What’s more, he said, cap rates are still
too low to make investments realistic. 

Edward Easton,
chairman of the Easton Group, a Doral-based commercial real estate
company, is more optimistic. Easton said the PPIP program should help
unclog credit — provided the gap between the pricing that the buyer
wants to pay versus what the seller wants to get narrows.    

“The
pricing has to get closer in order to execute the trade, but at the
moment the gap is too wide. The problem with the CMBS loans is that
they were made based on retail value and 90 percent-plus loan-to-value
and the renewable loan wants to be at wholesale value and 70 percent
loan-to-value,” Easton said. “The question that needs answering is,
‘how are we going to bridge the gap?'”

Mario Iglesias is
bullish on government intervention. He points to the 1930s when
government intervention — including the creation of Fannie Mae — led
to a new age in American home ownership.

“Before Fannie Mae,
only 20 percent of Americans were able to own their own home.
Similarly, investments in roads and other infrastructure by the
government can spawn commercial development,” said Iglesias, a partner
in the Fort Lauderdale office of Roetzel & Associates who works
with local and national commercial developers and banks.

“In
Broward County, for example, a new construction project is about to
launch, widening I-595,” Iglesias said. “The improved flow of traffic
on this important artery in our area will enhance the values of those
commercial sites that depend on this highway.”

If
municipalities and economic development groups use the stimulus money
to execute an overall strategic vision for the retail sector in their
areas, then the government’s intervention should work, according to
Charles Wetzel, president of Austin-based Buxton, a retail real estate
consultant.

“Now, if city leaders use the money to build
shopping centers and fill them with tenants that aren’t a good fit for
the area, the money will be wasted and not stimulate the local market,”
Wetzel added. “It’s going to take research on the part of cities and
developers to understand what customers are in the trade area they are
looking to develop.”