NEW CANAAN PARTNERSCRE Market Overview

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05/02/232

HOW WILL CRE BE RE-PRICED

In general, the capital markets are off their bottoms (for now), but real estate capital markets are a mess

This may persist for years…much longer than other credit markets

Virtually non-existent CMBS market leaves a huge hole in the financing picture

Distress will be common; price corrections often overshoot value corrections

IT WAS AND STILL IS ABOUT THE DEBT

Will we destroy it – i.e. Deflation, or…. Print our way out – i.e. Inflation (is it even possible with all of the losses looming?)

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HISTORY SUGGESTS THIS WILL BE HIGHLY DEFLATIONARY – A FINANCIAL WINTER UNLIKE ANY OTHER – BUT…

If this resulted in the Great Depression… …what are we about

to go through?

05/02/234

A PREDICTABLE RESPONSE FROM OUR CENTRAL BANKERS – REFLATE – SEEMS HIGHLY INFLATIONARY…

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THE FED DRAMATICALLY INCREASED THE MONETARY BASE TO STAVE OFF A DEFLATIONARY DEBT STPIRAL

DISTRESSED CRE – THEN V. NOW

THEN: RTC in the early 1990’s

• S&L’s saddled with bad CRE debt fail en masse

• CRE led the economy downward; over-building resulted

in a supply glut

• credit markets impaired but only for CRE & junk bonds

• consumer was still a net saver and their balance sheets

were in good shape

• balance sheet lenders ruled the day; far more

transparency

• government intervention generally had a positive affect;

the small size of the crisis made the RTC’s job easy

(relatively speaking)

NOW: The Great Recession (Depression?)

• the entire banking system is insolvent

• CRE dragged down by the economy; overleveraging was

and still is the problem; massive job losses crushed the

fundamentals (resulting in a supply glut!)

• credit markets are on life support; without an explicit

guarantee by the Fed nothing would get done

• consumer is under-employed, overleveraged and shifting

towards savings (‘paradox of thrift’)

• securitization (cmbs, cdo) markets have “spread the risk”

and muddied the waters

• government intervention is preventing price discovery and

creative destruction (mal-investment is being rewarded:

“’tis better to fail, and fail big”)

© New Canaan Partners 2009

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NEW CANAAN PARTNERSCRE Market Overview

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