US Debt: Is The Canary In The Coal Mine Already Dead?
And if so, what will the impact be on the commercial real estate market? Further, are there any ways that the various market players can try to protect themselves?
In other words…
• Has U.S. debt reached a level where the current $1 trillion-plus annual debt service payments will spiral even further out of control?
• A situation where reducing the size of the ever-growing treasury debt load becomes an impossibility?
• Where debt levels reach a point so that foreign investors no longer view US treasury debt as ‘risk-free’, and therefore demand a higher risk premium in the form of higher and higher yields?
• A point where interest rates don’t move lower, even if the Fed reduces it’s fed funds target rate?
Bruce Stachenfeld, Chairman of Adler & Stachenfeld and self-proclaimed Real Estate Philosopher, opines on how the various players in real estate should position themselves to be as prepared as possible for a debt crisis! (Bruce can be reached here bstachenfeld@adstach.com or here (212) 692-5550)
If I were a lender:
• I would avoid holding – or issuing – long-term debt.
• I would insist on interest rate caps and other protections from highly rated parties – not only during the loans but on extensions, etc.
• I would seek to issue floating rate debt.
• I would hedge my portfolio to the extent possible with options and other instruments.
If I were an investor:
• I would avoid floating rate debt – or insure against interest rate trouble with a swap.
• I would try to borrow long-term at fixed-rate numbers.
• I would hedge my portfolio to the extent possible with options and other instruments.
If I were a sponsor:
• I would avoid too much short-term leverage.
• I would develop in supply-constrained locations.
• I would generally be leery of development unless I had the funding and construction costs locked up for all – or close to all – of it.
• I would lock in long-term debt if possible, and as some gravy, I would negotiate as heavily as possible that the debt be assumable by a purchaser.
Along the foregoing lines, PACE financing
– or a long-term ground lease without inflation-adjusted bumps – would be really nice to have.
For all parties:
• I would want a nice pile of cash around – or the ability to draw down funds as needed.
• I would certainly not be relying on interest rates coming down to save the day, as many are still doing.
• I would assess, with hyper focus, what would happen to the tenants of the applicable real estate asset if there is a debt crisis.
• I would not sit around, doing nothing, waiting for a debt crisis to happen or not happen, assuming that a crystal ball will clearly tell me at some point. That is market timing, and if you have read my prior articles, you know what I think about that.
• I would gravitate towards real estate, which has pricing power, i.e., avoiding long-term leases with rents locked in. This would lead to hotels, multifamily, or other assets with short-term re-pricing ability.
I would diversify as much as possible:
• Geographically
• By asset class
• By type of investment
•By tenant mix
• And any other criteria I could think of
Finally, I will say that I do think that the odds are against a debt crisis really crushing the U.S. However, my view is, why not be prepared if so?
As for me, on a personal basis, I am putting a small percentage of my net worth into hedges that will skyrocket in a debt crisis. I am praying that these hedges expire worthless, but this is the best I can do to prepare. And, I urge others in the real estate world to think about the ideas I have outlined above, as a debt crisis might really happen.
To be crystal clear, I am NOT predicting a debt crisis. I am just saying that as it becomes increasingly likely to happen, I urge taking precautions just in case.
Bruce Stachenfeld can be reached here bstachenfeld@adstach.com or here (212) 692-5550.
Are You Buying Real Estate In New York?
Did you know that as the buyer, you have the RIGHT to choose your title insurance provider?
And that title insurance companies are NOT all the same?
Learn about the differences in our guide: https://www.linkedin.com/pulse/top-reasons-new-york-homebuyers-can-should-choose-michael-aw12e/.
Hallmark Abstract Service…You Buy Real Estate, We Protect It!
Google+