“A Crisis of Unprecedented Proportions is Approaching”

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It seems that everyone these days has a prediction about the commercial real estate market. Sayings such as “keep it clean until 13″ have emerged based on nothing more than the mere fact that CRE is in for a slow recovery and it needs time to work itself out. The incomparable Sam Zell has weighed in, saying the crisis is overblown, however I won’t be optimistic until Mr. Zell actually begins deploying capital into the market.

There are a few people in the business, however, who base their predictions on reason, logic, and statistics rather than hunches or optimistic thinking. One of those people is Dr. Randall Zisler, CEO of Zisler Capital Partners and former Princeton real estate finance professor. The major points from his interview are summarized below:

Real estate is not isolated from the rest of the economy, therefore there needs to be more transparency in many if the real estate investment vehicles (hedge funds/private equity – high-leverage with non risk-adjusted returns).
The bottom is going to hit in 2010.
We’re not going to be able to claw our way back until 2013 or 2014.
Building owners will default on $500 billion to $750 billion of mortgage debt. This equals as much as 54 percent of the $1.4 trillion in loans that will come due in four years.
The nation has to decide whether we’re going to recognize the losses or continue to let banks extend and pretend. If you extend and pretend and delay the point where you re-value these assets, transaction volume will remain low, price discovery is going to be impaired, and as long as price discovery remains impaired, we’re not going to be able to get back on a long-term growth path.
Generally, any deal done after 2005 with more than 70% leverage is underwater.
For people coming into the market trying to buy real estate at below replacement costs, the big unknown is when it will get back to replacement costs. If they expect to get their money back in 2-3 years, they may be surprised.
If the banks had to mark-to-market, a significant percentage would be insolvent. This is something the government doesn’t want to deal with.
It’s a question about how you want to recognize the losses, you can recognize it in workers unemployed, underutilized resources, or you can bite the bullet, someone has to pay the check, and the economy moves on.
The economic costs have already been incurred and the only question is whether we endure additional costs because we have people unemployed and vacancies in buildings, these are some very big policy issues.