On Wednesday, the Congressional Oversight Panel (COP) held a field hearing in Atlanta, Georgia on the state of commercial real estate lending. Appearing before the COP were government witnesses, real estate attorneys and local bankers and investors who offered their perspectives on commercial real estate, the financing markets and the performance of the Troubled Asset Relief Program (TARP).
Testifying before the COP were:
- Jon Greenlee , Associate Director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve
- Doreen Eberley , Acting Atlanta Regional Director, Federal Deposit Insurance Corporation (FDIC)
- Brian Olasov , Managing Director – Atlanta, McKenna, Long & Aldridge, LLP
- David Stockert , Chief Executive Officer, Post Properties
- Chris Burnett , Chief Executive Officer, Cornerstone Bank
- Mark Elliott , Partner and Head of the Office and Industrial Real Estate Group, Troutman Sanders LLP
- Hal Barry, Chairman, Barry Real Estate Companies
COP Chairwoman Elizabeth Warren introduced Atlanta’s newly-elected mayor, Kasim Reed, at the opening of the meeting. Noting that Atlanta is one of the “hardest hit commercial real estate markets in the United States” and that more than 30 community banks in Georgia have failed within the last two years, Mayor Reed welcomed all attendees and expressed gratitude to the COP for choosing Atlanta as the site for the hearing.
Thereafter, individual COP members provided opening statements:
COP Chairwoman Elizabeth Warren explained that the purpose of the COP is to oversee the expenditure of TARP funds and that from time to time the COP holds field hearings in different areas of the country especially hard-hit by the financial markets crisis. Chairwoman Warren noted that the results of the COP’s research of the commercial real estate market in Atlanta were “deeply disturbing” and that “Atlanta’s experience could foreshadow a problem that could echo across the country.” Chairwoman Warren stated that the COP hoped to learn from Atlanta’s experiences to better advance the COP’s oversight responsibilities nationwide.
COP member Richard Neiman noted that commercial real estate includes not only office buildings, shopping malls and hotels, but also multifamily and affordable housing units. Mr. Neiman stated that “financial stability begins and ends with the well-being of our neighborhoods” and that the “health of our communities is [the COP’s] ultimate concern.”
COP member Damon Silvers explained that the COP continues to ask three questions with respect to its oversight responsibilities: One, is TARP working to stabilize the financial system? Two, is the financial system doing its job of providing credit to “Main Street?” Three, is TARP functioning in a way that is fair to the American people? Mr. Silvers stated that the COP’s goals include ensuring that the federal government is fair to both big and small financial institutions and to “communities where commercial real estate financing is vital to maintaining community vitality and jobs.”
COP member J. Mark McWatters provided statistical data published by the Real Estate Roundtable regarding recent commercial real estate trends. According to the statistics provided by Mr. McWatters, commercial real estate values have declined by approximately $2 trillion since June 2008, and currently, approximately $3.3 trillion of commercial real estate debt remains outstanding. Mr. McWatters stated that the commercial real estate industry is faced with oversupply of facilities and undersupply of tenants and purchasers and that “until small and large businesses regain the confidence to hire new employees and expand their business operations, it is doubtful that the commercial real estate market will sustain a meaningful recovery.”
Mr. Greenlee provided an overview of his written testimony , which focused on the Federal Reserve’s efforts to help revitalize credit markets. Specifically, Mr. Greenlee highlighted the Term Asset-Backed Securities Loan Facility (TALF) program, noting that it “has been successful in helping restart securitization markets.” Mr. Greenlee also discussed the Federal Reserve’s efforts to encourage commercial real estate loan restructurings and workouts. He concluded by stating that in order to promote credit availability, the Federal Reserve encourages banks to “deploy capital and liquidity in a responsible way that avoids past mistakes and does note create new ones.”
Ms. Eberley noted that FDIC-insured financial institutions in the Atlanta area have experienced their greatest losses on “acquisition, development and construction loans, most acutely on loans for residential land development.” She also observed that falling home prices and a retreat from the weak lending practices that preceded the financial markets crisis have led to an oversupply of available residential lots for which there is little demand. Ms. Eberley highlighted several steps the FDIC has taken in response to the credit crisis, including issuing the Interagency Statement on Meeting the Needs of Creditworthy Borrowers in November 2008.
Mr. Olasov provided an analysis of the commercial real estate market crisis. Mr. Olasov stated that the combination of (1) banks sitting on “problem loans” and (2) more restrictive lending policies inevitably led to the constriction of available credit. He also stated that when there is distress in residential real estate markets, the commercial real estate mortgage market is the “next shoe to drop.” Mr. Olasov concluded by stating that until a mechanism is designed that will promote the movement of problem assets off bank balance sheets, banks will be less inclined to meet borrower requests.
Mr. Stockert highlighted the fact that the commercial real estate markets have had great difficulty accessing capital since the 2007 collapse of the commercial mortgage-backed securities (CMBS) markets. Mr. Stockert also highlighted the dramatic decline of new multifamily construction and the current oversupply of unoccupied housing. He stated that “[i]t seems likely that the excess inventory could be worked off quickly: economic recovery, demographic trends and the lack of new supply will combine to reverse the current supply-demand imbalance. But the timing is hard to gauge.”
Mr. Burnett provided an in-depth discussion of the commercial real estate lending issues in Georgia, noting that the hardest hit lending sector in Georgia has been the residential acquisition, development and construction segment, which “makes up the bulk of commercial related lending for Georgia banks.” He also discussed the impact of unemployment rates in Georgia on the multifamily lending sector. Mr. Burnett stated that he believes that Georgia banks are in need of additional capital and that the “overall success of TARP is mixed.”
Mr. Elliott focused on the current imbalance of the supply-demand dynamic of commercial real estate loans. He stated that on the demand side, “very few commercial property owners currently desire to take on new debt obligations; and on the supply side, “banks have been very reluctant to lend money secured by commercial office buildings.” Mr. Elliott also provided a discussion of recent governmental efforts to invigorate the private mortgage and securitization markets, including the “Public-Private Investment Program” announced by the Treasury Department, the Federal Reserve and the FDIC in March 2009.
Mr. Barry did not provide written testimony to the COP, but his oral testimony highlighted commercial real estate building trends in Atlanta over the past few decades. He stated that new construction of commercial real estate should not be based on a supply-and-demand philosophy, but rather a “build-to-lease” equation. Mr. Barry noted Atlanta’s recent trending towards urban mixed-use, or “live-work-play,” properties but also noted recent difficulties in obtaining commercial real estate financing to expand these new communities.