Real estate industry players are well past the stage of denial, if Wednesday’s real estate conference at the San Diego Marriott is any indication.
The featured speakers and panelists at the annual event -- organized by the University of San Diego’s Burnham-Moores Center for Real Estate -- repeatedly described an environment in which cash is king, financing is scarce and troubles are far from over.
“I didn’t come here with answers or solutions,” said keynote speaker Richard Davis, U.S. Bancorp CEO, after recapping the historic deterioration of the financial sector and the rise of government intervention in 2008. “I came to tell you this is where we are.”
The conference drew nearly 600 attendees and took place as President Barack Obama was announcing his $75 billion plan to stem foreclosures, which Davis said totaled 1 million in 2008.
The goal is to lower homeowners’ payments to no more than 31 percent of their income, using incentives and penalties to cajole lenders into participating.
Financial markets didn’t completely buy into the idea -- the Dow closed up only slightly, while the S&P and the Nasdaq both ended down -- but Davis and a few of his fellow speakers sounded optimistic about government action.
Obama’s housing plan and economic stimulus won’t solve real estate’s loan-to-value problems, Davis said, referring to borrowers faced with loans worth more than their property.
However, the funds will aid the housing market in bottoming out sooner rather than later, he said.
Davis also said that Treasury Secretary Timothy Geithner’s financial rescue plan would encourage lending within the next few months, although perhaps through the secondary market initially.
“Never before have two things mattered more (to the banking industry) than the TARP (Troubled Assets Relief Program) … and the stimulus plan,” Davis said. “It matters to everyone, but boy does it matter to us, because it’s everything we are. And I would suggest that the outcome of that future is directly related to yours.”
In the meantime, funding for real estate remains limited. Investors are demanding higher returns, while banks worldwide are tightening underwriting standards and trying to reduce the number of real estate assets in portfolio.
San Diego-based California Bank & Trust, for example, has done only one residential loan in the last two years, said the institution’s CEO, David Blackford.
Issuance of commercial mortgage backed securities has dried up, further hindering bank liquidity.
“It’s hard to find real estate financing anywhere,” agreed Gayle Starr, senior vice president and director of capital markets for AMB Property Corp.
Starr recounted how certain Japanese banks are refusing to make loans for longer than three years and are lending sums no greater than 45 percent to 50 percent of property value.
Obtaining capital may be easier closer to home, said Daniel Phelan, president and CEO of Pacific Southwest Realty Services, which has an office in San Diego.
Phelan pointed to conservative lenders now with a capital advantage -- such as smaller regional or community banks, credit unions and small life insurance companies -- as well as private equity and government-sponsored enterprises.
Panelists worried about the billions of rollover loans coming due within the next 10 years: as much as $171 billion in 2009 alone.
They urged those with looming maturities to start talking with lenders early and exploring extension options.
Many special servicers are trying to be proactive and extend loan terms, said Rebekah Brown, vice president of J.P. Morgan’s Asset Management division.
“But defaults and delinquencies are so high that extensions only make sense if there’s equity,” she added.
Opportunities will come in distressed properties and those with less variable demand, such as medical offices and student housing, Brown said.