Real Estate News
The Impact of the Fed Investment on Commercial Real Estate Investing
[Note: To follow is an excerpt of an interview with Dr. Aric Krause, Ph.D., a faculty member in the Bill and Vieve Gore School of Business at Westminster College in Salt Lake City, and RealSource Consulting Economist. To listen to, or download the show archive MP3, go to www.IncomePropertyInvestmentTalk.com/092408.] Mosca: I don"t remember a time where there"s been so much volatility and overall general populace concerned with what is happening with the financial markets. What happened to the simple times when you go to a bank, get a mortgage, and own your property? Krause: Think of it from the viewpoint of the individual lender. If you think about that transaction as it occurred, you went to a local bank, you knew the banker, the banker knew you, and the bank was going to carry that transaction for 20 to 30 years. So, what ended up happening is the bank was very strict as to whom it would lend to. The banking system was very much concerned with the quality of a loan when they made that loan. That"s very, very different today and is probably what led us to the current crisis that we"re in. The lenders are no longer concerned with the quality of the loan; they were being paid an incentive on the quantity of loans. The financial market evolved into a volume business transaction because the banks could sell off the risk immediately and didn"t have to hold the risk. Twenty years ago the banker was going to have a relationship with you for 20 years. Today, the lender may have a relationship with you for a month or so. There is no real desire to check or make sure the loan was a good institution. Couple that with the evolution of the industry. These last 10 years or so the Federal Reserve had very easy money. The lending, the number of lenders that are out there is very, very high such that there"s a lot of competition between lenders. The market is very different today than it was 20 years ago. Mosca: Of the three times that I moved up the housing ladder, and I"ve been blessed to be able to do so, it always struck me odd that when I went to closing I would have one lender and then two weeks later I get something in the mail that says that a second lender bought my loan. Is this an example of what you are talking about? Krause: That"s right. These last couple years have been marked by strange and exotic kinds of mortgages where anybody could go get a loan. In fact it was hard not to get a loan in these last five to seven years. Think about the impact of on the market. Everybody could have a home and that led to a much higher degree of demand. Prices were increasing and homes were appreciating very quickly in many markets and that incentivized people to move even more. The volume of lending, and the amount of money available, coupled with low regulation, led to a unique market and one we"ve never seen before. Mosca: Deregulation, deregulation, deregulation has replaced change, change, change as the main mantra in the media. What does deregulation mean to a commercial real estate investor? Krause: Many investors, myself included, think that the private market offers the best solution in terms of growth and stability in the economy. Even when the private market is on its own, it needs to have a regulator. That"s one of the clear messages from this debacle. There has to be oversight. The private market is very important but there has to be a referee. The only body with the authority and the capacity to try and help the situation is in fact government. Mosca: If we could have a drug czar and we can have the government seemingly involved in every aspect of our lives today, I would think $700 billion mandates that the government get involved. The talk here on the East Coast is Michael Bloomberg, have you heard that? Krause: I have. We do need someone with the wherewithal to pay attention to the market and understand it needs to be unfettered. The market needs to be allowed to create new jobs and new opportunities, but at the same time it needs a referee. Since the market was unregulated for the last X number of years and led us to this crisis, one has to wonder about how strongly the market is able to read signals. For example, with too many people getting mortgages in the last 10 years, and some getting mortgages they shouldn"t have had, we"ve seen that the private market lead to a solution that has really put us between a rock and a hard place. Mosca: What are some of the implications for the commercial real estate investor? Krause: Many large banks that typically engage in commercial lending are having liquidity problems. They are holding the bad assets of the mortgage industry and are having a difficult time lending. That could be loosened up if the government bailout occurs. Overnight rates for bank lending are incredibly high right now which signals mistrust and doubt in the market. Keep in mind that also means the person who needs lending less or has excellent credit worthiness could find a great opportunity coming up in the next couple of years. Mosca: Do you see other implications for commercial real estate investors? Krause: This crisis is going to cut across every sector of the economy, most of which we haven"t even seen yet. There may be an upside limit on rents and balancing out of prices. Clearly, those lean negatively for cash on cash and cash flow from a property. There are still communities in certain places of the country that are doing great, that are far less impacted by this crisis than others. One has to keep that in mind. There are still great opportunities. Mosca: Is that because those communities had visionaries on a local level? Krause: If a community had great economic activity without the overgrowth then you"re possibly going to find a place to be today. Communities in the southern part of the United States are just booming. Just because the market is in turmoil -- there"s a couple trillion dollars of bad activity out there that still needs to filter out – doesn"t mean that the world is bad, it means one has to be a lot more careful as to where they go and what they do. Mosca: What are the expectations an investor should possess? Krause: In 2002, 2003, 2004, it was normal for us to think in a range of 15-to-25-percent growth per year. In the 70s or 80s, it was probably more realistic to think 10, 12, and 13 percent. I think we have to go back to those more realistic return expectations. We have to recognize that these last 10 years may have been over inflated. Go back to the solid and stable expectations on an investment of 10 to 13 percent. If one does that and applies that to a particular investment and pencils that out and it works, then go for it. Mosca: I"m confident there are countless tens if not hundreds of thousands of people across this great country of ours that would welcome that type of growth. A lot of people, I know some in my own family have lost money with their investments whether its IRA investments, mutual funds, CDs, whatever the case may be. They would welcome that type of a return on their money. Krause: Over expectation has led fund managers or investors to go crazy trying to get to that return and in fact some of them have gone negative. It"s a negative market right now but I think it will return to a positive return but a more realistic one. Remember, that does not preclude the fact that there are some solid, stable investment opportunities out there in the right markets. Mosca: What is your golden nugget? Krause: The next six months are going to tell us a lot. That said there are still great opportunities out there in great places. One doesn"t have to sit on the sidelines for those sorts of investments, commercial specifically. I don"t recommend for anybody to invest in a home for a reason other than having a home. If you want to buy a home to have a home buy it.real estate course commented:
There are still great opportunity in eal Estate for the buyers who want to buy a home. I think fed investment has great impact on Commercial Real Estate investment.
23.03.2012