Real Estate: Tom Barrack Sounds the Alarm Over Commercial Lending

March 25, 2020 | Real Estate
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Tom Barrack penned a white paper that outlines the need for massive and immediate relief in the commercial real estate lending markets. Barrack is the Chairman and CEO of Colony Capital (NYSE: CLNY).

Barrack makes the case that if the commercial real estate lending markets fail, the spillover effect to the rest of the economy will be disastrous. He predicts the results “could be exponentially worse than the economic effects of the 1987 crash, September 11th attacks, and 2008 recession, combined. The long-term impact on the economy could be catastrophic.”

He points out that that is not a case of bailing out lenders that had made stupid loans to chase higher returns.

He writes, “The profound impacts of both the COVID-19 pandemic and the public health measures taken in response to it on the American economy have caused high-performing mortgage loans, grounded in solid economic fundamentals, to suddenly and sharply decline in value. As a consequence, banks, publicly traded mortgage REITs, and other non-bank lenders now find themselves at a precarious juncture.”

Tom Barrack On Lender Challenges

Most of the loans currently under pressure were reasonably underwritten loans with reasonable loan-to-value ratios. Almost overnight, that has changed, and the funding market for commercial real estate has dried up to a great extent. Barrack is urging the White House, Congress, and assorted regularity agencies to work with banks and other commercial lenders to find solutions that allow the market to function correctly.

Among other possible cures, Barrack suggests allowing the Secretary of the Treasury to be provided with up to $500 billion to support programs or facilities to provide liquidity to the financial system. He also asks for regulatory relief and a delay in implementing new account rules in the banking system that would free up billions of dollars of capital to support the commercial real estate lending markets.

In an interview on Bloomberg TV after he released the paper, Barrack told reporters that “To keep people employed, you have to support the employers. The biggest part of employer expense is rent. When commerce stops, and they can’t pay rent, and they can’t pay interest on the debt, and then the banks and the intermediaries can’t pay their investors, it all collapses.”

You can download a full copy of Barrack’s paper here.

It is worth the time to read to fully understand the risks that commercial real estate lending markets cold present for the rest of the economy and financial system.

By: Tim Melvin

Recent: Real Estate: IQHG Locks Up 109 Brookline in Fenway Area of Boston

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