Although the economic fallout from the "great recession" would have been much higher without the steadying hand of government, its activity also has other consequences, including a potential downside for the commercial real estate sector.
At the Sept. 24 International Council of Shopping Centers' capital marketplace conference in New York, two speakers voiced concern about the potential for inflationary pressure down the road from Federal Reserve activity in buying up Treasury bonds. This year, the U.S. Central Bank has committed to purchasing up to $300 billion in Treasury securities.
This sort of activity serves to essentially monetize government debt and add to money supply, which also creates inflationary pressure in the economy.
Talking about the federal government's role in repairing the capital markets, Daniel Alpert, a managing director with New York-based Westwood Capital, said that faced with a "double whammy," the government came up with a number of programs to stabilize the market.
Among other actions, the Federal Reserve is maintaining its target interest rate as low as 0%. While this is necessary to encourage economic activity, Alpert pointed out that one of the reasons the economy ended up in its current situation is because of the low interest rates earlier this decade.
"A 0% interest rate makes it easier to take risk, and we're putting out more cheap money," he noted. As he sees it, the government now is encouraging banks to delay the day of reckoning by "kicking the can down the road."
There has been about a trillion dollars worth of asset write-downs by banks so far, and Alpert expects there is another trillion dollars in write-downs coming.
He expects commercial and residential real estate to have declined as much as 40% in value by the bottom of this real estate downturn.
"The ability of government to really focus and get us out of this Japanese-style mess is really key," according to him, considering that there are a number of government agencies involved in various efforts that don't talk to each other.
"One thing I have found with Washington is that they don't want to declare victory and get authority taken away," Alpert said.
With all its activity, the government hopes to get more private capital into the system and get banks to lend more. However, without any change in the economy and employment situation, the banks are still hesitant to put out money.
In the current situation of high unemployment and low capacity utilization, the government activity does not pose any inflationary concern, but the government faces a delicate situation in terms of unwinding the programs down the road. There is the problem of "liquidating the liquidity guarantee program."
The Federal Reserve, in particular, is caught between a rock and a hard place and needs to maintain a delicate balance in managing its interest rate policy.
Delivering an economic forecast at the conference, Sam Chandan, president and chief economist with New York-based Real Estate Econometrics, also touched on the potential for inflationary pressure from Federal Reserve activity in monetizing debt.
He estimated that about $300 billion of commercial real estate debt is due for refinancing in 2010. An increase in inflationary pressure means that the Central Bank will have to move toward higher interest rates faster. That will not be an interest rate environment that is "supportive of refinancing."
However, Chandan does see some positive signs for the sector. For instance, the share of banks that has been tightening lending standards for commercial real estate borrowers peaked in the fourth quarter of 2008 at higher than 80%, and this number has been declining steadily since then.
For investment-grade borrowers, 22% of U.S. banks expect to normalize lending standards in 2010. Another 20% expect to normalize standards for such borrowers in 2011.
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