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Robert Knakal on the Bulls vs. the Bears – Who Do You Trust?
Who’s right about the state of the economy and commercial real estate – the bulls or the bears? Robert Knakal, chairman of New York-based Massey Knakal Realty Services, weighs both sides to help us cut through the mixed messages.
In a recent interview for the Alter NOW Podcasts, Knakal noted that the bulls like to cite the best back-to-back GDP growth since 2003 – 5.9 percent in the 4th quarter of 2009 and 3.2 percent in the 1st quarter of 2010. Bears, on the other hand, believe that weak consumer spending will cause the GDP to grow at an anemic two to three percent for the rest of the year. Knakal views this is an interesting dynamic because of the growing number of economists who back the bears’ position – numbers that are well below the trend coming out of a recessionary period.
Knakal, a graduate of the Wharton School of Business, also writes StreetWise, a nationally syndicated real estate industry blog, is concerned that many loans made by community and regional banks are five-year loans, which will mature in 2011 and 2012. These loans raise the loudest alarms, because many are still performing thanks to very advantageous interest rates – possibly in the form of interest-only loans or with interest reserves that are carrying the property. When these loans – which now could have an interest rate as low as two percent – mature, it will be renewed at a 5 ½ or six percent interest rate that will require a de-leveraging process. Some $10 billion banks are carrying half of all their commercial real estate exposure in Small Business Administration (SBA) loans.
Despite the bears’ lack of confidence in the commercial real estate markets, capital is available to credit-worthy users chasing high-credit projects. The amount of available private equity is currently estimated at approximately $173 billion. Public REITs raised more in common stock offerings in 2009 than they did in the previous nine years. Non-public REITs are expected to raise $10 billion this year. Sovereign wealth funds are said to have access to an astonishing $3.5 trillion. What Knakal cautions us to recognize is that these often represent the same pools of equity and to draw the distinction between capital that has been promised and that which is actually available.