For the past nine months or so, the business media has predicted the dropping of the proverbial “other shoe”: commercial loan portfolios on bank balance sheets. As the economy crashed, tenants failed, rents weren’t paid, new prospects disappeared. These are value drivers of commercial real estate. You might recall the doomsday prediction that by the summer 2009, the commercial loan portfolios would be in full death spiral taking banks and developers with them. Well here we are at Halloween and the predictors were wrong.
And now this.
The Wall Street Journal just reported here that “Banks Get New Rules on Property” thus all but assuring that the shoe wont drop. Regulators are going to back off their aggressive demands that lenders clean house: the banker’s game of “extend and pretend” now comes with the governmental seal of approval.
Clearly this ruling takes the pressure off of banks to aggressively clean their balance sheet. Prior to the rule change, falling values and loan covenants put the bankers in a position of demanding action. In many cases, this pressure would force a change in property ownership and recognize the current, though temporal, lower valuations.
The new policy may have a couple effects, both intended and unintended. First, the vulture funds created to take advantage of the anticipated RTC style feeding frenzy may not get their carrion. These funds were relying on banks to aggressively light the fire sale. Without pressure from the banks, developers and owners may not have to sell at today’s values and most likely, they wont. The net result is that these vulture funds may not find enough property to purchase or may end up buying garbage real estate. Not what they had intended.
Secondly, this ruling may keep the lending and real estate markets in their current frozen state and prolonging this painful real estate recession. If there are no willing sellers at current valuations, there will be no transactions. As they say, it takes two to tango.
If you own commercial real estate that is in trouble, this rule change is likely good news. If you were hoping to pick up distressed property on sale, this ruling is bad news.
