Despite Opportunities, CRE to 'Suffer' Next Year

MBA (9/15/2008 ) Murray, Michael
Ron Insana, former senior analyst at CNBC now working within the investor community, said commercial real estate will suffer next year, but will also present "attractive opportunities" for investors.

“There will be different points along the way where commercial real estate, which will suffer next year, is going to become attractive—just not yet,” Insana said in a Mortgage Bankers Association Executive Podcast.

Insana said contractual obligations slow tenant turnover, and anecdotal evidence shows overbuilt construction is leading to more difficulty in finding tenants and meeting price expectations.

“Next year, that is going to be a real big problem for financial intermediaries that are going to face both souring construction loans and probably bad commercial real estate investments or loans as well,” Insana said.

Financial markets continue to evolve as “one of the most random environments” with respect to market behavior and present one of the most difficult periods Insana said he has seen in his 24-year career as a business journalist.

“I think this will, in history, compare in some ways to both the 1930s and the 1970s, although maybe not to either extreme,” Insana said. “There is a combination of both eras taking place right now where you have radical deflation in financial assets, particularly real estate right now. We have huge dislocations in the financial system—banks contracting their balance sheets, lenders pulling in their horns—and we have some commodity shocks going on that are somewhat analogous to the '70s, although I don’t think it is the same kind of inflation problem we had then.”

The failure of Continental Illinois Bank in 1984 was the first serious news item for Insana, followed by the stock market crash in 1987 and the savings and loan crisis in 1990 and 1991. The bankruptcy in Orange County, Calif., and the Mexican peso crisis in 1994-1995 preceded the Russian ruble crisis with the commercial mortgage-backed securities meltdown. The Long Term Capital Management hedge fund collapsed in the late 1990s, and by the turn of the century, the dot-com bubble burst. Insana also reported on the recession at the time of the September 11 terrorist attacks.

Insana noted, however, that this current workout has taken much longer than financial crises in the past.

“Each one of those [crises] were solved relatively easy, shockingly enough, with some pretty enlightened policy that allowed both the markets and the economy to stage—pretty much—something of a bottom,” Insana said. “This is something different. This is a much longer workout cycle, given how pervasive the credit crisis is, the use of derivative instruments and the use of leverage—and it’s a global phenomenon. As a consequence, I don’t think it goes away easily and I don’t think it goes away anytime soon.”

Insana said he expects the financial market situation worsened since May, and it will get worse in 2009 and be harder on individuals than this year.

“It’s confusing and complex for most regular people who don’t have to deal in this on a day-to-day basis," Insana said. "They just get affected by it.”

However, while lenders return to basics, Insana said well-capitalized investors could have the “opportunity of a generation” in purchasing distressed assets. “There are entire housing developments that have been put up by builders that are substantially empty, and they are able to come in and put money to work just buying communities,” he said. “It’s going to take quite some time for this inventory of unsold homes to work off.”

Condominiums, vacation condominiums and second homes in Miami, San Diego and Las Vegas are strong investments, Insana noted, and some sovereign wealth funds have purchased vacant housing developments in the United States. “Buying certain mortgage securities makes a lot of sense in the distressed arena,” he said.