The Real Estate Doesn't Matter. Really?

I recently attended a national real estate conference that included attendees from all walks of real estate life - developers, lenders, investors, public officials, special servicers, architects, brokers and the whole herd of specialties that come together to promote the responsible use of land. These are the professionals, myself included, that are creating, reshaping and/or preserving the built environment in which we live, work and play. These are the "experts." It was especially troubling then when a special servicer speaking on one of the panels inadvertently summed up the disconnect between the financial markets and the tangible, physical world of real estate. Special servicers are entities that are paid, usually based on a percentage of the unpaid principal balance of a loan, to deal with loans that require some sort of "special" attention. This can be a result of late payments, inadequate documentation or other items that cause these loans to go in to default. Today, and for the past several years, special servicers have been especially busy wading through the morass of bad debt resulting from the financial meltdown. In other words, they are supposed to be among the problem solvers to right our listing real estate ship.

Working on behalf of bondholders and governed by the U.S. Securities and Exchange Commission, the special servicer on the panel said plainly and bluntly, "the real estate doesn't matter." The same panelist, speaking more specifically on the commercial mortgage-backed securities (CMBS) that have recently had a particularly deleterious effect on the world of real estate finance, noted that "CMBS is good for properties that aren't going to change."

Why is this problematic? For one, there is not a single piece of real estate in our built (and unbuilt) environment that is not subject to change. Whether due to tenant changes, market changes, physical context changes, zoning and entitlements changes, ownership changes, changes due to natural events or any of the other seemingly endless range of changes that can affect any single piece of property, entering in to what amounts to a financial contract under the premise that everything will stay the same is naive and ill-conceived. While there may, indeed, be some real estate that is relatively more predictable than others, all real estate is subject to change. There are likely few owners out there that would say the past four years of real estate ownership have gone exactly as planned.

Secondly, the notion that so called "experts" tasked with working out problematic real estate financing mechanisms believe that "the real estate doesn't matter" gets to the core of real estate's current uncertainty and on-again-off-again malaise. Some may argue that it is precisely the real estate that does matter, since it is, again, sometimes the tangible and physical manifestation of financial invention run amok. To say "the real estate doesn't matter" is to disregard the everyday presence of the effects of past exuberance. If a special servicer is in place, the real estate still matters.

Our collective built environment is the stage upon which our daily lives unfold. Of course, some of these stages function better than others, but they all play a role in how we live, work and play. For the financial perspective of some to be based on a belief in static properties and the notion that "the real estate doesn't matter" does not bode well for resurrecting our built environment in a timely and accretive manner.