Janice Svec
Senior Director—REITs
\ fitCh ratinGS
2009 IS CLEARLY a very challenging year. Operating fundamentals are declining
and conditions in the capital markets are extremely difficult. In particular, the key
element is to preserve and enhance liquidity. Those companies which are
truly alive at the end of 2009 will be in a position to capitalize on truly exceptional opportunities that will begin to emerge later in 2009, but especially in 2010 and 2011.
It’s very difficult to predict the timing, because the answer is dependent on
government intervention. The stimulus bill that was passed [in early 2009] should
pump some liquidity back into the economy, but the effects will take some time.
The downdraft in the economy that occurred in the fall of 2008 was so severe that
it may take additional government spending to stabilize economic activity.
There is a tremendous amount of private capital sitting on the sidelines today,
and what investors need to feel is confidence that economic conditions won’t continue to get worse. Once we reach economic stabilization, investors will begin to
allocate capital again, and the industry can begin to move forward.
Before the U.S. economy begins to grow again, it must first stabilize, and the key
is fixing the financial system. The Obama Administration is working hard to address
this because it understands that economic growth depends on access to credit. A
recovery will be elusive until financial institutions start lending money freely again.
This includes jumpstarting the securitization markets, including the CMBS market.
While these markets are unlikely to return to activity levels seen in the mid-2000s
for the foreseeable future, they need to function in a simplified way in order for lending
institutions to recycle their capital. Government guarantees for collateral in the securitized markets are crucial initially to provide investor confidence, and straightforward
underwriting will ensure that they function without government guarantees in the
long run. From an operating perspective, market conditions are difficult for REITs.
In virtually all property sectors, market rents and occupancies are declining. In some
sectors, tenant bankruptcy filings are up. Real estate transaction activity, particularly
leasing and investment/sales, is down dramatically, as a high degree of uncertainty in
the market is causing most participants to wait and see. However, REITs with long-term leases to solid tenants benefit from the fact that declining property fundamentals
have only a gradual effect on property
level financial performance.
Ultimately, I think that this uncertainty will gradually dissipate as
confidence returns to the financial
markets and as real estate transactions begin to normalize. REITs
with strong liquidity, balance sheet
strength, and access to capital will
ultimately outperform both public
and private market participants that
are capital-constrained.
Sam Zell
Chairman
\ equity Group inveStmentS
OBVIOUSLY, THE ECONOMY is in a
recession, and the REIT industry needs
to exercise extreme caution. The recession
is likely to get worse before it gets better.
The key to economic stability is in the
housing market. We’ll get through 2009
with little-to-no [housing] construction,
and we’ll see absorption, which will stabilize the housing market and help [the
commercial real estate industry] as well.
The good news is that we went into
this [recession] without much commercial real estate construction and oversupply. I think we’ll see a
significant
strengthening of the market in 2010
and 2011. F
andrew kist
