The Federal Reserve this week extended the emergency program to help jumpstart credit markets by providing loans to buy bonds backed by commercial real estate mortgages. CRE capital market participants and industry advocates applauded, saying the added time may finally instill enough investor confidence in the program to pry open the commercial mortgage securitization market, frozen since last year.
The central bank and the U.S. Treasury said Monday it will extend the government’s Term Asset-Backed Securities Loan Facility (TALF) by another three months for previously issued, or “legacy” commercial mortgage-backed securities (CMBS) and asset-backed securities through March 30, 2010; and another six months for new CMBS issues, through June 30, 2010. The program, set up to provide up to $1 trillion in low-cost financing, was originally scheduled to expire Dec. 31.
“Conditions in financial markets have improved considerably in recent months. Nonetheless, the markets for asset-backed securities backed by consumer and business loans and for commercial mortgage-backed securities are still impaired and seem likely to remain so for some time,” the Fed and Treasury said in a joint statement. The Fed said it will continue to monitor financial conditions and will consider in the future whether conditions warrant a further extension of the TALF.
Real Estate Roundtable called the action timely and said that it “sends a clear message to markets that the Fed and the Treasury understand the gravity of the problem in commercial real estate markets.”
CoStar Advisor spoke with capital market experts from CB Richard Ellis and Jones Lang LaSalle about the potential of the TALF extension to resurrect the securitization market. They said the action, while shorter than the one-year extension the industry was hoping for, will likely provide market players with enough lead time to put together the complicated TALF-eligible CMBS transactions.
Enoch Lawrence, senior vice president of capital markets in CBRE’s New York office, told CoStar Advisor he believes that the longer the program’s duration, the better the chance for its success as market prices stabilize and investors rediscover the balance between risk and return.
“What you’re really dealing with in the CMBS market is a lack of confidence. By the first deadline, there really wasn’t any time to get new origination deals put together and get out to the market to see what their impact would be,” Lawrence said. “It may not be fair to judge the program yet because many of the market participants feel it really hasn’t had time to start working.”
The main challenge to TALF has been uncertainty about whether the government would shut down the program after banks and investors had expended considerable time and capital putting together deals, added Stephanie Lynch, vice president/real estate investment banking with Jones Lang LaSalle.
“Banks need to get their origination staffs back in the market and focused on making new loans. The question has been, ‘Are we going to be able to have all this work done before the end of December?’” Lynch said. “Also, nobody wants to be the first mover and make mistakes, especially if program doesn’t work, or if they make a loan that is determined later to not be eligible for the program. They don’t want their capital tied up in that way, going through all that trouble to get maybe one issuance into the program before it expires.”
“You now have the market saying, ‘Okay, we now have until June of next year, we can get some deals done and we’re not going to have to start a program that we’ll have to shut down right away.”
The extension comes as evidence mounts that TALF may be on the verge of breathing some life into the dormant CMBS market. The Fed in June extended the program to cover new CMBS issues, and several transactions reportedly are being prepared, with some possibly hitting the market in the next few weeks.
In what could be the first test of the program, mall owner Developers Diversified Realty Corp. (NYSE: DDR) is reportedly working on two bond sales totaling $600 million backed by TALF to raise new capital and refinance maturing debt. Published reports have also cited potential transactions by Vornado Realty Trust (NYSE: VNO), Westfield Group, Macerich and Freddie Mac. Both Lawrence and Lynch said they’re finally seeing heightened activity in the securitized market.
“Some of the larger pooled transactions that had no options in the past now may have an option with the issuance of TALF-eligible CMBS,” Lawrence said. “That’s going to positively impact some of the larger institutional owners in REITs that can go out and issue these CMBS securities and give investors some very attractive opportunities to buy triple-A pieces of those deals,” Lawrence said.
Some key questions remain, including whether the program is large enough in scope to make a difference in slowing the current wave of commercial property defaults and foreclosures — TALF will do little to reduce losses from overleveraging — and whether deals can generate yields attractive enough to warrant new property acquisitions. Another question is whether the securitized bond market will continue to function after the TALF expires, Lawrence said. Most of the early transactions will likely be financial restructurings and refinancings rather than new mortgage originations, he said.
At the end of the day, experts agreed the real estate recovery will depend more on improvements in the economy and traditional property fundamentals than on a government program.
The flow of liquidity to commercial real estate will be critical for a sustainable recovery, but “unless there is a tremendous short-term recovery in the CRE markets, we expect the Fed will be revisiting the issue of another extension of the TALF program early in 2010,” predicted Robert Toothaker, chair of the National Association of Realtors Commercial Alliance Committee.
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