the aftershocks we are still feeling. This is to say nothing of the
uncertainty about the speed and size of the next stimulus
package, which could have a large impact on the depth and
length of the recession.”
Perhaps most troubling for commercial real estate are those
aforementioned mass layoffs. According to Robert Bach, SVP
and chief economist at Grubb & Ellis Co. in Chicago, 533,000
net payroll slots were cut in November, on a seasonally
adjusted basis, marking the highest monthly total since
December 1974. Year-to-date losses amounted to a staggering
1. 9 million.
“The recent acceleration in job cutbacks capped by the
massive loss in November indicates that leasing market fundamentals are poised to soften further. It is very likely that layoffs
will continue through most of 2009, meaning that tenant
demand for commercial real estate, which lags the labor mar-
ROBERT BACH
SVP & CHIEF ECONOMIST
GRUBB & ELLIS CO.
CHICAGO
I think the bailout will work. However, it
could be sowing the seeds for more financial troubles down the road, and it will
not keep the economy from falling into a
severe recession. I say this without knowing where the bailout will end, how big it
will get or what direction it will take this coming week, let alone
next year.
The $700-billion Troubled Asset Relief Program is just part of
the story. The government has already spent $1.4 trillion on
loans, insurance and direct investments. It has guaranteed $8 trillion in investments, deposits and debt obligations, which could
be just a down payment on the final tally. At this point, we don’t
know if it is working. Would conditions be worse if the government did nothing or enacted a more limited program? It’s
impossible to say for sure. A minority opinion holds that these
actions have made things worse and that tax cuts for consumers
and businesses might be more effective. But the US and governments around the world seem willing to do whatever it takes to
“I think the bailout will work. However, it could
be sowing the seeds for more financial troubles
down the road.”
stimulate demand and restore confidence in the financial system. It’s possible that these actions—flooding the economy with
money and pushing interest rates to the floor—are creating an
environment for future inflation and perhaps a wrenching loss of
confidence in the dollar. But that is a risk the US Treasury and
Fed appear willing to take.
A severe recession is already a foregone conclusion. We will
begin to see by the second half of 2009 if these measures have
been successful. Several factors would signal a return to normalcy; namely, if the economy begins to grow, if home prices find
a bottom, if banks start to lend, if oil and other commodity prices
increase, if interest rates rise and spreads fall. In commercial real
estate, success will be measured by an increase in investment
ket, may not firm up until 2010,” Bach writes in his summary
of the most recent employment figures.
Bach was one of the six experts Real Estate Forum asked to
give their predictions on what the next 12 months hold for the
country and the commercial real estate business. Uncertainty
seems to be the prevailing mood as our prognosticators wait to
see if the federal bailout will have its intended effect, namely,
loosening up a locked credit market that has all but shut down
the acquisition arena. In this challenging environment, commercial real estate brokers must learn a whole new skill set, or
they could find themselves among the unemployed. Only the
strongest, most nimble and cash-laden—or those who can bone
up on workout procedures pretty quick—will survive.
No one is expecting 2009 to be a year of recovery. Or as
Bette Davis said, “Fasten your seat belts, it’s going to be a
bumpy night!”
property sales via increased lending and a movement of equity
capital off the sidelines, despite leasing market fundamentals
that are likely to deteriorate into the first half of 2010. At this
point, I think the Fed, Treasury and FDIC are being bold, creative and willing to experiment with different actions. They will
continue to do that until the financial system stabilizes and banks
are lending again.
R. KYMN HARP
ATTORNEY/PARTNER
ROBBINS, SALOMON & PATT
CHICAGO
Right now, the commercial real estate
market is stalled. Borrowers are in default,
but lenders are not aggressively seeking
to take control of their collateral. In this
market, lenders have little incentive to
take over distressed and defaulted projects. There is virtually no market to unload the collateral except at
deep discounts, which will force lenders to book a loss as well.
Also, if properties are not cash flowing, the problem is most likely
not because of poor management, which the lender could correct
by simply hiring another professional manager or by having a
receiver appointed at substantial additional cost.
Instead, lenders are biding their time until market conditions
improve. It is not uncommon to see them extending maturity
dates or default cure periods for successive stretches of 30, 60, 90
or 120 days. Borrowers are thankful for these brief extensions.
However, to obtain them, some are draining other investments to
make interest payments to forestall defaulting and a potential loss
of their property. The hope seems to be that the lender will help
them hang on until the market recovers.
Unfortunately, financially distressed borrowers are only too
“Borrowers are in default, but lenders are not
aggressively seeking to take control of their
collateral.”
happy to accept stopgap solutions. More than once I’ve been told
that because money is tight, these borrowers do not wish to incur
substantial attorneys’ fees to negotiate real solutions to real prob-
