4 Signs of Life in the Past Week

It has become a cliche to say the economy is showing signs of life — but, then, there it is. The economy IS showing signs of life — as well as the commercial real estate industry, which all but had its final rites time last year.

To be sure, there are several challenges including the yet-to-be-resolved question of where billions of dollars of commercial property debt will find refinancing, the record high CMBS default rates and several legislative initiatives that are worrying the industry.

But never mind those for the moment. Instead consider what has happened in just the last several days:

• Citigroup is bringing a $222M RMBS to market — a private-label RMBS — according to the Financial Times. The bonds are expected to be AAA-rated, backed by 255 residential loans originated by CitiMortgage.
• REITs — at least the publicly traded ones and even many unlisted REITs — are going gangbusters. Last year they raised a record amount of equity, primarily used to shore up balance sheets. This year they are on track to match that or more. Better yet, at least some of this war chest is expected to be used to make acquisitions. This week alone saw five REIT IPOs or stock offerings including Kilroy Realty, Chatham Lodging Trust and Macerich Co. which raised an eye-popping $1.23 billion.
• The reviving CMBS market is pushing out more transactions. Glimcher Realty Trust CEO Michael Gilmcher, for example, told USA Today that the company just acquired $100 million in loans will be sold into the CMBS market in order to refinance loans for shopping centers in Tennessee and Ohio.
• Europe’s structured finance market is getting back to its feet as well too. Property investment fund Vesteda launched a $471 million CMBS this week, the first in Europe for almost a year.

International accounting standards and the political process

There are a lot of potential accounting changes facing commercial real estate firms as U.S. and global authorities remake standards. There is, as Real Estate Roundtable’s Jeff DeBoer recently pointed out at a Realshare conference, the matter of lease accounting, which depending on how the rules are redone, will have a dramatic impact on how leases are accounted for. There is the question of how long banks will be able to carry non-performing assets on their books.

Then there is the convergence of international standards, which will usher in an entirely new chapter of accounting regulations for real estate firms and REITs. For instance, in a video on NAREIT’s home page,  George Yungman, SVP of Financial Standards, notes that under International Financing Reporting Standards, REITs will have the choice of opting for fair value standards – as many international firms already do.

Getting to the point where developed and developing countries have reached a consensus – much less adoption – of one set of standards is clearly not easy. Assuming it is done correctly, the payoff could be significant for both firms and their shareholders. (One only has to look at the lessons learned from Lehman Bros.’ global shuffling of $50 billion in assets to understand that). Hearing, then, about the potential of undue political pressure placed on the process can be maddening. I am not going to claim the U.S. is an innocent in such matters, but a news report from the Financial Times on Monday illustrates how far some officials are willing to go with this.  According to the FT, European Union’s new internal market commissioner has suggesting linking the future funding of the International Accounting Standards Board to whether it goes along with suggestions from the European Commission.