The commercial real estate industry would like a bailout – see my preview/links to testimony before the JEC today. This is not a surprise – even some of the most libertarian people I meet think the government should help them personally when times are bad. Is there a case treating commercial real estate as special?
The sector is definitely taking a beating, but who is not? This lobby’s most sophisticated advocates are arguing that various Fed facilities can be extended to support commercial real estate financing, i.e., so there is no cost to the government’s budget or your future taxes.
This is illusory.
We cannot have the Fed indefinitely take over the provision of credit to most of the economy. Asset prices need to fall and, if necessary, debts have to be restructured. This is easier, generally, for commercial real estate developers and operators than it is for residential mortgages.
The global crisis is surely not finished, but we are out of the panic phase. There is little compelling reason to provide “emergency” financial support to anyone at this point.
The price of retail space is falling because consumers are spending less and retailers are contracting or going out of business. This is painful and will turn around only when consumers figure out the new (higher) level of savings they want. We are already cushioning this blow with a big increase in public spending and a difficult future for public debt issues.
Going further for commercial real estate specifically is not appealing. If we do it for them, why not for everyone?
Of course, if commercial real estate worsens considerably, we will see further damage among banks. But didn’t the government stress tests assure us that the banks have enough capital to handle even worst case scenarios?
By Simon Johnson