Monday, March 7, 2011
I have posted Too Big to Fail vs. Too Small to Notice: Addressing the Commercial Real Estate Debt Crisis on SSRN. (This is the bigger article that I teased earlier.)
I have directed this article to policymakers and scholars, but I hope that it may also be useful for those teaching Real Estate Transactions, to supplement textbooks by providing a current snapshot of the state of the commercial real estate industry.
Many thanks to Jim Durham of Dayton for taking time out of his vacation to read and comment on this piece!
Here's my abstract:
The commercial real estate industry has been devastated by the current economic crisis, losing 40% in value since the end of 2007. As a result, commercial real estate borrowers owe lenders $1 trillion more than their properties are worth. Although the federal government has been warned that the commercial real estate debt crisis may cause a double-dip recession, the government’s response thus far has been to allow the market to work itself out. This Article argues that this laissez faire response rests upon flawed assumptions about the structure of the commercial real estate industry. Compounding the problem, policymakers are incorrectly interpreting increased lending and transactions in the upper echelons of the market as a signal that their policies are working. Instead, the current approach has forced sales at distressed prices, numerous foreclosures, and, perhaps most importantly, significant small bank failures without any systemic benefits. Policymakers have seen these losses as an unfortunate but unavoidable cost of the recovery process, and dismissed these small actors as not “systemically important.” In fact, this Article argues that in the aggregate, small commercial real estate borrowers and small banks are vital to fueling job creation and economic recovery. By focusing primarily on the health of large financial institutions, borrowers, and properties without due consideration for the smaller players, the current policy may lengthen the economic crisis by placing further stress and uncertainty on some of the most vulnerable segments of the economy.
As always, comments are much appreciated!
[Comments will be held for approval and may be delayed]