Good, Bad and Ugly – ULI’s Blank on Obama, economy and confidence in markets

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By Jesse McKnight
Executive Vice President, The Saint Consulting Group

steven-blankListening to Stephen Blank, Senior Fellow for Finance at the Urban Land Institute (ULI), can be a sobering experience, as he proved again at the ULI conference in Atlanta where he described the economic recession as the “Lindsay Lohanization of capital markets” – saying they have spiraled out of control and need to rebuild their confidence.

Last fall, at the ULI meeting in Dallas, Blank left me reeling with forecasts that our economy was in for a long, bumpy ride with no end in site. However, he was more reassuring this week in Atlanta.

While we are still on that ride, perhaps we can at least see the corner if we haven’t actually turned the corner. And he gave us all a taste of what to expect from the Obama Administration, the economy in the coming months and best bets and opportunities.

When Blank spoke in Dallas, we were in the midst of “34 days from Hell” – government takeover of Fannie Mae and Freddie Mac, bankruptcy of Lehman Brothers and the first tranche of corporate bail-outs. Essentially, we had seven 1,000-year floods in 34 days.

Blank has equated the economic debacle from sub-prime mortgages to the 2007 Chinese toothpaste scare, when Chinese toothpaste poisoned over 150 people in Panama, due to high levels of glycerol. No surprise that toothpaste “Made in China” inspired as much confidence as sub-prime mortgages “made in US capital markets.”

After the toothpaste scare, all ships from China were re-inspected and many products re-engineered, although they had nothing to do with the company that made this toothpaste. These safeguards were necessary to boost consumer confidence to buy Chinese products again, although they yielded little, if any, new issues or problems with Chinese goods.

That’s where we are today, re-inspecting, re-engineering, we are not buying in this economy yet. We are on a buyer’s strike — it is better to wait than to make a decision, than to “pay too much” – and sellers refuse to budge from last year’s numbers, because they are afraid to sell for too little..

What Blank says to look for in the coming months?

• We’re in round 1; it’s not perfect, but Obama has made a very strong start. Obviously, the Federal Reserve of New York “gets it.”
• Will stress tests on banks to be released in the next week, break the logjam? He seemed to believe that release of the tests will be an overall positive. Although it could be problematic for a few banks.
• Loan terms are currently structured initially as three years. The real estate community is working with the Obama Administration to extend these loans to a more friendly five to seven year term.
• Capitalization rates will continue to increase
• Development will remain constrained, without any large real estate deals until after September, 2009.
• Still some black holes out there. Construction loans are still out of balance on projects that are running past schedule and taking too long to build. Also, newly built projects are taking too long to rent.
• Condo projects – still too many out there and will take time to flush out.

On the road back to perdition?

• Normalcy will return…over time, and at a price.
• REITS are trying to get enough capital to get through 2012, putting capital in the bank.
• I tell people it will end when we go 90 days without bad news.
• A month ago, I would have told you I saw no recovery signs, but today I do. Some promising signs from the TED averages (the spread measuring the difference between the interest on 3-month U.S. Treasury’s and 3-month LIBOR.) although still not back to historic averages.

Best Bets and Opportunities

• Go slowly…”Early will prove to be the new wrong.”
• Be patient and horde cash.
• Buy loans – yours or someone else’s – at a discount from a financial institution ready to clear its balance sheet
• Hold core assets (keep the best, sell the rest)

As a Senior Fellow, Blank’s primary responsibilities include: expanding ULI’s real estate capital markets information and education programs; authoring real estate capital market commentary for ULI’s web site (; participating as a principal researcher and adviser for the Emerging Trends in Real Estate series of publications; researching and authoring papers and articles on finance issues for Urban Land.

Jesse McKnight is Executive Vice President, The Saint Consulting Group, email, phone 510 770 1511

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