When Will the Capital Freeze Thaw?


The capital markets are still in varying states of paralysis. This paralysis originally set in mainly due to losses ignited by the residential sub-prime meltdown and disruption in other financial markets such as credit default swaps. These losses created a very large erosion of capital causing many financial institutions to fear for their existence and made capital preservation the main priority – not lending.

The TARP funds already committed and the expected continued government stimulus has helped to settle the capital markets but uncertainty now results from what lies ahead for economic fundamentals, especially for the commercial real estate markets. Most investors are concerned that the economy will continue to deteriorate and correspondingly impact real estate cash flow and values.

This potential significant decrease in collateral value will increase the difficulty of refinancing maturing loans in a market where capital is already limited. Also, institutions holding significant investment in CMBS maturities will be more concerned in 2009 with asset managing their portfolio rather than seeking new investments.

As a result, capital is still “semi-frozen” and any funds available, both debt and equity, will be invested on a very conservative basis.

It is my opinion that the current restricted availability of capital will continue for most of 2009, but that a thawing will begin to take place by early 2010 as the impact of the government’s full stimulus package kicks in and, hopefully, starts to improve overall economic conditions.

Readers, what is your projection for the timing of the final thawing of the real estate credit markets?

– Craig Butchenhart