By Christopher N. Macke
Liquidity Created Market’s Problems,
So Don’t Look to It as the Solution
I RECENTLY RAN ACROSS THE FOLLOWING QUOTE
in my local paper, the Chicago Tribune: “In the ruin of all
collapsed booms is to be found the work of men who
bought property at prices they knew perfectly well were
fictitious…because they knew that some still-greater fool
could be depended on…” What makes this quote noteworthy is the date—April, 1890. This reminds us that we
have overcome the effects of speculative buying before.
The text also points us toward the solution to today’s
commercial real estate problems.
On varying occasions during the peak in the cycle,
I had conversations with sellers that began something
like this: “We have a 30-year-old industrial building in
Nowheresville, USA. It is conservatively priced at a six
cap.” While their “conservative” pricing indicated an over-
Realistic pricing will create the liquidity
necessary to get the markets going again,
not the other way around.
heated market, what was really telling was their response
to my comment that even if I wanted to pay that ridiculous
price, I couldn’t because I would have negative leverage.
“Chris, you don’t understand,” I would hear. “I can get
you a 10-year loan with an 80% advance rate at 75 basis
points over the 10-year Treasury and five years of interest
That was when I knew that liquidity—too much of itwas a problem. CMBS loans had become the equivalent
of Michael Milken’s junk bonds and caused an equivalent
speculative bubble in commercial real estate.
During the latest speculative bubble in commercial real
estate, buyers first turned to the $230 billion of CMBS debt
issued in 2007 to pay more and maintain their minimum
cash-on-cash returns. When that reached its limit, they
started changing rent growth assumptions, vacancy rates,
etc., to generate the necessary metrics. When even that hit
its limit, buyers still continued to pay more, believing “that
some still-greater fool could be depended on…”
Today’s investors know that the prices paid during the
recent peak are not justified by normal debt and underwriting assumptions. They understand that if they were to
pay the same prices the current owners paid, they would
become the greater fool. So much like trying to prop up a
currency that is overvalued, trying to prop up today’s commercial values to their former speculative levels through
government programs, like TALF or PPIP, won’t work.
Pricing is today’s primary problem, not liquidity. Realistic
pricing will create the liquidity necessary to get the markets going again, not the other way around. During the
Federal Reserve’s 45th annual conference on banking,
the refrain, “We need the money to get off the sidelines”
was repeated in presentations and casual conversations. It occurred to me though that the money is off the
sidelines, but it is smart money. And smart money isn’t
going to be substituted into the position of all those who
overpaid during the last peak.
According to data from Real Estate Research Corp.,
even without current deterioration in NOI levels, the value
of properties purchased at the peak of the last cycle
would need to decline by 30% to 35% just to get back
to their historic average valuations. Taking into account
today’s decreased NOI levels, the percentage is even
greater. When people learn we provide senior loans on
quality hospitality and office buildings, they ask what they
can do to obtain senior debt. I tell them to “buy right,” and
the money will be there.
Thomas Paine wrote in his introduction to Common
Sense, “Perhaps the sentiments contained in the following pages are not yet sufficiently fashionable to procure
them general favor…and raises at first a formidable outcry in defense of custom.” As he also said, “Time makes
more converts than reason.” I hope that enough time
has passed to allow the necessary number of converts
in both the private sector and government to see that
at this point in the commercial real estate cycle, pricing
creates liquidity, not the other way around. A continued
sole focus on liquidity will only exacerbate the problem
in commercial real estate. ◆
The views expressed in this column are those of the
author and not necessarily REAL ESTATE FORUM.
Christopher N. Macke is chief executive officer of Chicago-based General Equity Real Estate. He may be contacted at