Bob Grant provides a summary of comments made by Jeffrey DeBoer to Congress about the struggling state of the commercial real estate industry. Key points include: refinancing capacity presents an ongoing risk to property values as $300-500B in commercial real estate loans will mature annually through 2020; capitalization rates have increased 250 basis points while rents have declined 20% depending on property type; the lack of transactions makes it hard to accurately value properties; and regulatory flexibility is needed to restructure loans and allow banks to extend performing loans based on cash flow to avoid foreclosures. Michigan in particular continues to struggle more than other states with industrial vacancies over 13% and expected retail vacancy increases of 2% and rent declines of 4%

1. Bob Grant’s Commercial Real Estate Update
Contact: 248-321-1405. Rgrant56@gmail.com
Perhaps this all sounds too negative, but…..
Refinance Capacity Presents an Ongoing Risk to Values
On July 9, Jeffrey DeBoer on behalf of the assess creating an even more difficult lending
Real Estate Roundtable made some revealing environment. While Mr. DeBoer stated that
statements to Congress relative to the state he was “here today to sound the alarm bell” Keep and Eye on C&I
of the Commercial Real Estate Industry. I his proposed solutions were, in part, to es-
have summarized some of the information tablish a federally-backed credit facility and  GROWING INVENTORY
here as I thought there was some good to encourage banks and loan servicers to  GROWING A / R
macro level information that should impact extend performing loans based on cash
underwriting for some time. Mr. DeBoer was flow. It seems to me that our industry is sup-  DETERTIORATING WORKING CAP
describing the environment for the six pri- porting properties that are generating posi-  LATE STATEMENTS
mary areas of commercial real estate ; tive cash flow...albeit that today‟s positive
apartments, office, retail, hotels, industrial cash flow could easily be next months break-  SLOW COMMUNICATION
and health care. Mr. DeBoer‟s fundamental even cash flow or worse.  CHANGE IN CPA
issue was the lack of available credit from
all funding sources resulting in transaction There are some interesting charts on subse-  SLOPPY SHOP
volume being down 80% and estimated quent pages that you will be interested to
 CHANGING CONCENTRATIONS
asset values down 35% from their peak.. see. One interesting fact is that Commercial
Banks hold about 43% of the credit to this  DELINQUENT PAYROLL TAXES
Further, he estimates that capitalization rates
sector…about $1.5 Trillion. The CMBS mar-
have increased 250 basis points while rents ket accounts for $750 Billion or 22% ( it  PAYING LATER THAN HISTORICALLY
have declined 20% depending on property sure felt like more than that 3 years ago),  NEED SITE VISITS!
type. Of course we all know anecdotally while life insurance companies account for
that here in the Midwest, the impact is often $315 billion or 9%. Other government spon-
even more dramatic. The other issue that sored programs account for most of the rest.
DeBoer raises (fairly) is that the lack of real As you know, Commercial Real Estate loans ● Manage Your Stress
transaction activity makes it more difficult to are extremely prevalent in the Regional and ● Get Organized
evaluate the real market value of a prop- Community banks making the impact of to- ● Exercise
erty. Reflecting the circular nature of this day‟s problems broadly troubling.
problem, loan-to-value is more difficult to ● Enjoy Relationships
● Stay Hydrated
● Take a break , breathe
Michigan: Where Do We Fit In? deeply
● Eat Right
As we proceed through our 7th or 8th year will likely increase at least 2% this year while ● Do a little volunteering
of recession with increased risk resulting from rents will likely be down by 4%. The one spot ● Laugh
the aggressive automotive restructuring, of relative parity is in multi-family where ● Google “ Jim Valvano
Michigan will continue to suffer more than the Michigan is not in the bottom ten markets in the Speech.” Watch it
rest of the country. Metro-Detroit‟s industrial country. Still, even nationally vacancy rates (again)
market reports vacancies of at least 13% are expected to increase nearly 2% in 2009
(feels higher) and it‟s hard to see where im- while CAP rates continue to trickle up. Hang in
provement will come from. Retail is suffer- there...fight through 2009 and
ing nationwide and Michigan „s vacancy rate 2010...something has to give!

2. Look at the growth over 10 years from 1988 to 1998 and contrast it with the 1998 to 2008 period! The pen-
dulum swung pretty far….over retailed? Too many hotels ( again) ? In 2007 the CMBS market issued $230
Billion in bonds. In 2008 this plummeted to $12 Billion. Thus far in 2009…there have been no new CMBS issu-
ance! Until that source of funds ( or some other to be developed) returns, there will be continuing pressure on
values and access to funds.
In 2009, the amount of maturing commercial real estate loans is estimated to be be-
tween $300 and $500 billion. Maturing debt in this sector continues to expand. With
an average $400 billion of commercial real estate debt maturities each year, over
the next decade the market ,as it is currently structured , does not have the capacity
to absorb this demand according to DeBoer. Who will refinance maturing debt?
What will the impact be on values next year and for several years to come?

3. “Given the lack of liquidity, regulators must give lenders and mortgage servicers
more flexibility to restructure loans and make modifications when a positive
outcome can be generated. It is also important for bank regulators to establish
policies – possibly in the form of guidance - that would temporarily encourage
banks to extend existing loans that are current – where there is adequate debt
service coverage to service debt payments.”
“In the banking sector, since long-term value is hard to determine in the current
environment, bank regulations should temporarily encourage banks to extend existing loans where
there is adequate debt service to cover payments. Such guidance would also encourage banks to
focus on cash flow and debt service coverage and minimize costly foreclosures and help alleviate the
pressure on banks to reduce their commercial real estate exposure.”
These issues are not just about 2009, but will require ongoing awareness, negotiations ,
and modifications over some years. We all need to be aware of the duration of these
problems. It seems to me that , as an industry, we will need more support from the regu-
latory agencies as the impact of Commercial Real Estate problems impact more banks
more deeply than the residential problems do. Be as aggressive with your restructuring/
collection actions as you can be...I think it will get worse before it gets better.
Quotables:
● “Victory belongs to the most persevering” Napoleon Bonaparte
● “Strength does not come from winning. Your struggles develop your
strengths. When you go through hardships and decide not to surrender,
that is strength” Arnold Schwarzenegger...yes, I just quoted Arnold!