To forecast the real estate market for 2010, it is important to revisit where we have been in the last few years.
From 2000 to 2007, the ability to borrow money at a low cost, without limits, resulted in a dramatic increase of the value of real estate.
The bubble exploded in 2008 and the value of real estate has dropped between 30% and 50% depending on the asset class.
Throughout the latter half of 2008 and all of 2009, banks have been holding debt they cannot get repaid.
Rather than focus on new loans, throughout 2009, most banks opted to borrow at nearly 0% and invest in government securities at 2%, waiting to see if Washington’s stimulus program would bring about economic growth to reverse the negative tide. Thus the catch phrase ‘extend and pretend’ emerged. In essence, they have become ‘zombie banks’ – much like their Japanese counterparts in the early 90s.
I believe 2010 will be a year in which banks aggressively clear their balance sheets of problem loans. Early indication of this is the dramatic growth of the ‘workout’ or ‘special assets’ groups at many of the commercial banks. Until bank balance sheets are cleaned up, stock prices will not rise. The Obama administration opted not to implement a RTC-type program to resolve the current real estate crisis — a program that proved effective (and efficient) during the last major real estate downturn. As a result, I believe the banks have no choice but to handle there problem loans in a similar manner, but in-house.
CenterMark is poised to act on these opportunities. While a few new projects may have been foregone during the peak of 2007, my decision to head to the sidelines at this time proved to be beneficial. Sometimes it is better to be lucky than smart. By focusing on 1) dispositions during this peak (rather than acquisitions) and 2) property management, I have found myself in a position of stability and financial ability to act on new opportunities.
I look forward to working with my retail, broker, banker, developer, and municipal relationships in the coming year.