By ALAN J. BEAUDETTE
Many of the challenges we face in real estate merely are repeats of what we saw in the late 1980s.
What no one is talking about is the tremendous opportunity we have to create more than 360,000 jobs in our struggling economy in the next 12 to 18 months.
After researching history and integrating current challenges, I believe the opportunity exists to generate hundreds of thousands of direct and indirect jobs to deal with the disposition of problem loans on both the commercial and housing side during this down cycle.
These new job estimates are supported by the more than $42 billion in estimated fees that will be paid for services required to work through problem loans and assets that we anticipate will be coming back to financial institutions.
Direct jobs are estimated to total more than 145,000. Many of these jobs are high paying,including advisory, legal, property and asset management, appraisal, underwriting, as well as many other real estate jobs.
Additionally, using real estate industry multipliers, another 210,000 indirect jobs could be created that benefit from the spending generated by direct jobs.
S & L; Crisis
History offers some insight with the savings and loan crisis of the 1980s and 90s.
During the early 1980s, Congress granted savings and loans new powers. Among others, these powers included lower reserve requirements and the ability to expand lending and invest in real estate ventures.
It wasn’t long before Congress tried to correct this mistake and tighten regulations. But for many S & Ls;, it was too late.
In 1989, the federal government had to step in and bail out S & Ls; by forming the Resolution Trust Corp. The RTC was charged with liquidating these financial institutions and disposing of failed real estate assets and mortgages from the S & L; industry.
By the time it all came to an end in 1995, 1,043 institutions with more than $402 billion in assets (most of which were in commercial real estate loans) failed. This cost taxpayers more than $153 billion.
During the bailout, the federal government spent more than $400 million in administrative costs that were not billed back to individual receiverships. According to the General Accounting Office, those bill-backs plus administrative costs totaled $88 billion.
Data is not available on specific breakdowns, but it is reasonable to assume that these bill-backs included all kinds of service fees to vendors including lawyers, property managers, brokers and countless vendors supporting the property disposal activities.
What we are seeing today makes the S & L; crisis pale by comparison.
Guarantees and cash payments by the federal government now exceed $7.5 trillion. Currently, 25 financial institutions are in the hands of the FDIC with assets exceeding $17 billion. Another 114 financial institutions have taken federal money totaling more than $168 billion. It has been estimated that hundreds of additional banks will fail in the next 12 to 18 months.
At the same time, both commercial and residential real estate values continue to fall in many markets around the country. Capitalization rates for high quality buildings are up more than 300 basis points from levels of just six months ago.
This increase alone wipes out any equity from commercial borrowers utilizing traditional leverage ratios. Coupling this fact with plunging tenant demand and falling lease rates means that even high quality real estate assets are in trouble.
In the current real estate downturn, it is likely that commercial loan failures will follow a similar pattern to the residential failures we are already seeing. Unlike the 1980s though, it is expected that the magnitude of failures we are anticipating will dwarf what we experienced during the RTC bailout.
Although many lenders still have performing loans in terms of debt service payments, it is likely that many will find that their borrowers are in violation of loan covenants due to declining real estate values. How these lenders treat these activities on the commercial side remains to be seen.
Federal regulations dictate that when a loan is in default, lenders must set aside cash reserves at substantially higher levels. With cash in short supply, lenders will be challenged with developing a strategy that may include utilizing federal money.
It is not known exactly how many jobs were created during the RTC crisis. We can only surmise by reviewing the available government data that a large portion of the $88 billion in RTC administrative costs related to industry jobs. With the trillions of dollars in hard cash outlays and government guarantees, it is difficult to imagine that the size of the real estate challenges will not be substantially larger than during the S & L; crisis. Therefore, we feel our assumptions are likely conservative.
New Approach?
Our hope this time is that the federal government takes a different approach to disposing of the real estate assets that will be coming back to lenders. Rather than creating government entities and jobs to work through troubled assets (FDIC and a potential new government agency), it appears to make much more sense to take advantage of an experienced and existing distribution network,our existing banking system,specifically those that have received federal funding.
As taxpayers we have already invested in well more than 125 banks. It seems to make sense to utilize them to work through the problem loans and assets. The $42 billion in estimated fees will go a long way to stabilizing these banks and helping them repay some or all of the debt they have borrowed from the American taxpayer.
Some may believe that government has all the answers. But there are many others who have faith in the ingenuity of American businesses and the entrepreneurs that are out there working every day creating private sector jobs. A wonderful opportunity exists for the federal government to take advantage of our existing real estate and banking infrastructure to put countless people back to work.
Beaudette is chief executive of Attentus Advisors in Irvine and is former national chairman of the National Association of Industrial and Office Properties.
