In late March 2009 a populist outrage forced the return of contracted bonuses by some AIG managers and employees. In many cases these bonuses were a major portion of the remuneration for highly skilled individuals who had been lured back to help unwind the complex financial instruments that have cost AIG, and now the taxpayers, so many billions. By using a media fanned flame of public rebuke, those who are looking for perpetrators of the recession exacted revenge against those believed responsible. At the same time however, this put into question the standing of contracts. If a contracted bonus payment can be removed by public opinion, what prevents other contracts and their terms from erosion?

In this environment, everything is negotiable, all the time.

In the last newsletter it was suggested that job losses would continue on pace through May. That still appears to be the right call. The resulting increase in vacancies for office properties are headed for a national rate of 20% by the end of 2010. In the capital markets, the U.S. Government TALF program

hints at components that may revive the CMBS markets. That's the best news of the recovery for Commercial Real Estate (CRE) as outstanding CMBS holdings nearing the end of their term increases dramatically in 2010. A recovery in the debt sector would allow lenders to transfer new loans to balance their holdings as needed. Without a recovery in this key area, it is unlikely that debt would come available in time to prevent a crash in pricing. As spring brings new life to the earth, those who have exhausted their winter reserves, perish. So too in CRE as those who were over leveraged are unable to survive such a long period of frozen markets.

At the peak of the CRE sales bubble, many were heard to complain that deals were being re-traded several times before, during and occasionally even after closing. As the landscape changed, sellers pushed for more and more to maximize their profits on deals that take months to plan and negotiate. Now, those buyers, who were put through the ringer on the way in, are turning to their debt holders and applying the same techniques, threatening to walk away from properties that lenders know they could not sell quickly. Write downs are becoming increasingly common as both sides find ways to survive together. Many owners have dodged or delayed their end by renegotiating existing debt covenants. In these deals, the terms are the important part as the rights of the debt-holders increase, providing them even more opportunity for profits in the longer term. Normalcy will return only when pricing is more stable.

Institutional investors are ruled by their own herd. As professionals holding fiduciary responsibilities, they are punished for straying too far from conventional wisdom. As Geoffrey Dohrmann, President and CEO of Institutional Real Estate, Inc. put it "If they take a chance and win, they get a bonus, if however they fail, they go to prison." In that environment, few would be willing to dramatically reduce pricing on assets now, and sell at 63 cents on the dollar. Instead, they will be forced to ride it all the way down, waiting until the wall of CBMS debt hits in 2010, and sell for much less. But there are always choices. Longer hold periods could prove the right course. As debt markets recover, those able to extend their positions, may find it worthwhile. In addition, derivatives and default swaps, which were just beginning to gain favor in U.S. CRE, may provide the much needed liquidity and flexibility. Still further,

cash constrained owner/users yield excellent sale lease back opportunities.

With the dramatic shift in demand and pricing for CRE, the opportunities are greater than they were in the good old days of 2004 through mid 2007. But now, the risks are scrutinized far more closely.



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