Senior resident fellow of finance, Urban Land Institute

Darrick Meneken

As published in Scotsman Guide's Commercial Edition, March 2009.

In its 30th-annual "Emerging Trends in Real Estate" report, a joint venture with PricewaterhouseCoopers, the Urban Land Institute (ULI) says this will be commercial real estate's worst year since 1991 and '92. Stephen R. Blank, ULI's senior resident fellow of finance, tells us why the report forecasts double-digit price drops and a drought for owners looking to refinance.

More than 600 real estate experts contributed to the most recent "Emerging Trends in Real Estate" report. What's the consensus outlook for the commercial market this year? When you total losses since the 2007 cyclical peak, property values will be down 15 percent to 20 percent and possibly more. We're going to see an increase in foreclosures and delinquencies. Refinancing is a black hole.

The commercial-mortgage-backed-securities (CMBS) market shrank tremendously in 2008. What are the effects of that, and what do you think the CMBS market might look like this year? The CMBS market is closed. If you talk to people who are active in [the CMBS] business, people can make a case that there will be no issuance in 2009.

[Thus,] we have a huge liquidity crisis. You can't find capital to buy properties, you can't find capital to refinance existing mortgages, and there are all these theoretically toxic securities being held by the financial institutions.

How should mortgage brokers react to this crisis? Brokers have to be harshly realistic with themselves and harshly realistic with their clients. It isn't going to be easy to get financing. That's not to say there won't be any. Brokers should work on transactions where the clients are the most-realistic, where they understand what's going on in the marketplace and where they're in a position to act appropriately.

Don't sit there and think that you're going to be the one who's going to outperform the market. It's just very hard to do.

How can brokers help solve some of the refinancing woes? They should work with their clients to find other sources of [funding]. Maybe it's a combined refinancing that uses a conventional loan with an equity insertion from a mezzanine investor.

What else might create liquidity? Loans that are performing that are going to have a maturity default could be extended. That's good for the lender -- it doesn't really want to take the loss -- and it's good for borrowers who can afford to continue to pay the interest and stay with the property. Certainly, the fewer properties that go on to the market, the stronger values are.

Is there a risk of holding up values artificially? It's not artificial. Instead of forcing properties into foreclosure, let's renegotiate the loans. Many owners can afford to pay their property's debt service but are going to have a maturity default based on the fact that underwriting is much stricter.

Who are the winners in today's market? People who require low leverage. Anybody who's not a high-leverage buyer has a terrific competitive advantage.

Darrick Meneken is an associate editor at Scotsman Guide. Reach him at (800) 297-6061 or darrick@scotsmanguide.com.