cash is
kingha Dried-up capital markets
ve forced commercial real estate
companies to conserve
By Allen Kenney
SINCE THE BIRTH of the environmental movement, conservationists have promoted a number of easy, everyday ways to minimize consumption of natural resources.
Turn the water off while you’re brushing your teeth. Walk or ride a bike in lieu of driving. Recycle your bottles and cans.
These days, the commercial real estate industry finds itself in the midst of its own
conservation push involving one of its most precious resources: capital.
“Capital is the mother’s milk of commercial real estate,” says David Fick, managing
director with Stifel Nicolaus. “In good times, you need that capital as your growth
engine, and in bad times, you need that capital just to survive. Without it, there’s no
ability to weather the kind of economic storm we’re going through today.”
Capital Roads Closed
In their never-ending search for new capital, commercial real estate companies appear to be finding more closed doors than
open ones. Data compiled by NAREIT
and SNL Financial Inc. show that initial
public offerings of REITs have steadily
declined since 2004, with just two companies going on the market in 2008 as
of Dec. 31. REITs made 69 secondary
equity offerings in 2008, compared with
82 in 2007. Debt offerings fell from 43
for $18.2 billion in 2007 to 11 for $5.2
billion through the end of 2008.
The commercial mortgage-backed securities (CMBS) market is a non-starter.
Since the middle of 2008, CMBS issuance has ground to a complete halt.
Whereas 2007 saw $230 billion in CMBS
issuance, just $12 billion of securities
were issued in 2008, all of which occurred
during the year’s first half.
Likewise, commercial real estate companies that approach banks for new borrowing are either turned away or offered
ruinous lending terms. Banks have ratcheted up credit standards significantly,
with nearly 90 percent reporting tighter
requirements in the fourth quarter of 2008
compared with three months earlier, according to Federal Reserve Board data.
As a result, new bank lending has been
reduced and has become increasingly
expensive.
Liquid Courage
All of this comes at a tough time for the
industry. Federal Reserve data show that
outstanding commercial real estate debt
currently totals approximately $3.4 trillion, the vast majority of which has been
provided by banks and CMBS. In the
next three years, some estimate that more
than $1.2 trillion of that debt will mature,
including $400 billion in 2009.
In the past, commercial real estate
companies relied on the credit markets
to refinance their debt when it came due.
If the credit markets aren’t functioning,
however, it puts the companies in a position where their short-term goal of thriving is replaced by simply surviving.
Consequently, the dearth of affordable
capital available through the debt and
equity markets is forcing companies to do
some creative belt-tightening in the name
of conservation.
“Capital preservation has become an
imperative because the global credit crisis
has greatly diminished the availability—
and increased the cost—of capital available to real estate companies to fund their
businesses, including acquisition and
development activities and long-term
