I just finished up two days attending the Dealmakers Summit sponsored by Institutional Real Estate. It was held in San Diego and featured senior players primarily from the equity side of the business — owners, pension fund advisors, brokers, and consultants.
The mood was generally pessimistic, especially after hearing from the economists (CRE fundamentals would continue to deteriorate) and the transaction brokers (sales volume down 95% from the peak). However, there were at least a few people who thought “the bottom” would hit in 2010 with transaction volumes picking up in the second half. But, most thought the real estate markets would be dead through next year, would have some activity in 2011 and a bottom being found in 2012.
Regardless of opinions on timing, everyone agreed that the recovery will not happen unless and until there is a functioning debt market. There was a lot of discussion regarding CMBS and what it would take to get the market open. A panel was dedicated to the government programs (mostly TARP, TALF and PPIP), but that panel concluded the programs have so far not been particularly beneficial to commercial real estate.
Of course, I proposed the “Transparency Solution.” I argued that if CMBS investors had access to the underlying real estate information (specifically the rent rolls), that would go a long way to reestablishing CMBS as an asset class worthy of the capital markets. At a minimum, we would attract value “real estate” investors into CMBS because they could do the real estate math themselves.
Since these were people who own or deal with hard real estate assets who would never buy an asset without analyzing a rent roll, they understood the importance of that piece of data. In fact, almost everyone I spoke with assumed that full data disclosure of rent rolls would be a reasonable condition of investors returning to CMBS.
When the conversation turned to “what does that mean,” things got more controversial. I brought up the fact that, if rent rolls were included in the IRP, then for any property that had CMBS debt, tenancy schedules would be “public” because Web sites like CMBS.com would have the data available for analysis.
Most reactions to that fact were negative. Some owners went as far to say that would keep them away from using CMBS debt. Others did not think it was a major issue because people in the market always end up knowing that information anyway.
We talked about using technology to try and keep a “lid” on the offensive data (hiding tenant name, for example), but everyone assumed, at least for the discussion, the data would be “wide open.”
Even with that, the consensus was 1) a functioning debt market is critical for everyone and 2) it is reasonable for CMBS investor to have access to rent roll data in a usable format. If owners were ultra sensitive and did not want to participate, they could always stay in the private debt markets.
My take away was, if the capital markets demand rent roll transparency, the equity market, for the most part, will adjust.
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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders, rating agencies and investors.