Mike Kirby
Chairman
\ Green Street aDviSorS
2009 WILL BE the worst year in modern times for the commercial real estate industry.
Fundamentals are declining rapidly as the economy continues to weaken at the same
time large debt maturities in the 2010 to 2012 time frame move ever closer. Defaults
will likely skyrocket and financial distress will be widespread. The primary goal for 2009
should be to make it to 2010.
The Obama Administration’s recognition that it needs to do something to fix the lending market for commercial real estate is likely going to be helpful. The real question is
whether it will be enough of a help to make a big difference. There are about 20 parts of
the securitization market that are broken, and the government can only fix a few of these.
A lot of progress will need to be made elsewhere before securitization markets can play a
meaningful role again.
While the downturn is clearly bad news for everyone, REITs will fare far better than
most private vehicles. There are several reasons this will be the case, but the biggest one
is that REITs typically used less leverage than most private players. The private
equity buyers in particular will come out of this with such awful performance that their
entire business models will be called into question. High-fee, high-leverage, business
models will be out of style now for many years to come. This will benefit REITs, because
they are the low-cost provider of exposure to commercial real estate.
Hamid Moghadam
Chairman and CEO
\ amB property Corporation (nySe: amB)
WHAT IS UNIQUE about this downturn is the speed with which it
occurred, the sharpness of the falloff and its global nature.
Most REITs have had significant development businesses, creating
considerable value for their shareholders in the past. The development
environment for REITs should improve at some point in the future,
as many of the private players are in financial difficulty. That means
the development platforms of REITs are going to be very valuable.
As bad as this downturn is, there will be an end to it. Having those
development capabilities available will be an important
competitive advantage.
In the long term, the most significant outcome of this downturn will
be fewer competitors—both public and private—on a global scale. We
will see lower levels of development and new additions to product lines,
with a real differentiation of results based on the quality of a company’s
portfolio. In a tough market such as this, quality portfolios will expand
their outperformance over time, and I think that should continue into
the months and years ahead.
