Horizon, Host: Ted Simons

July 25, 2011


Host: Ted Simons

Commercial Real Estate


  • An Arizona State University professor says he has a solution to help fix the Valley’s ailing commercial real estate market. W.P. Carey School of Business Real Estate Professor Mark Stapp will explain his idea.
Guests:
  • Mark Stapp - ASU Real Estate Professor
Category: Business/Economy   |   Keywords: ASU, housing market,

View Transcript

Ted Simons: Good evening, and welcome to "Horizon." I'm Ted Simons. An ASU real estate professor says he has an idea to help heal Arizona's commercial real estate market. The key -- local lending sources focused on local businesses. Here to tell us more is ASU professor Mark Stapp. Good to have you here, thanks for joining us.



Mark Stapp: Thanks for having me.



Ted Simons: The core for this is that it's difficult right now to find funding for projects, period. Correct?



Mark Stapp: That is correct. The lending market is -- I wouldn't say it's completely shut down, but it's pretty much impossible to find funding for most projects.



Ted Simons: And why is this?



Mark Stapp: Well, it's a reaction to what happened in the financial crisis. Number one, I think there's been a movement to tighten up a lending underwriting requirements. And a lot of the demand that drives real estate projects has waned. And because real estate is symptomatic, it's something that is driven off of jobs, and it's driven off of other kinds of wants and needs. A lot of those projects aren't there either yet, so the things that are doable are much smaller scale than what we're used to seeing.



Ted Simons: I want to emphasize that smaller scale aspect in a second, but you've written that the trouble with commercial real estate, the market started when the basics were overlooked. What does that mean?



Mark Stapp: Well, one of the things that happened is as the investment banking firms realized they could bundle mortgages together, and then sell those bundled mortgages to investors, they began to realize that in order to do that they had to have a lot of product. And in order to get that product they had to underwrite it relatively quickly. So they started looking for things they could understand easily, like kinds of assets that they saw, they could wrap their hands around, they could underwrite, and bundle it. And so banks then had to go, start making loans on those kinds of projects. And so we started to commoditize real estate to shifted those investment funds out of the area to investors from around the country and around the world. So we created this disconnect between the dollars that are necessary to grow a community, and the investors that are providing those dollars.



Ted Simons: Because those investors are looking for the big ticket items, the Big Kahuna, if you will.



Mark Stapp: You're also looking at an industry that's trying to achieve efficiency. It takes just as much time to underwrite smaller things than larger ones, and you bundle these big pools, and there's big fees, and there's more efficiency associated with it.



Ted Simons: The nuances of smaller loans to smaller businesses in smaller communities, or any community, but the smaller loans, those nuances get lost in the mix, don't they?



Mark Stapp: They do. Because they're unique, they're small, they're unlike other things that you may see other places and as a consequence, the underwriters have a hard time wrapping their hands around them. They don't recognize the users, they may not recognize the locational attributes, and it’s not something they're really familiar with. It's harder for them to underwrite and price.



Ted Simons: Is that one of the reasons why it's been such a slow rebound from the recession?



Mark Stapp: Well, I think the rebound has got another -- a number of factors that are stopping it from rebounding quickly. One of which is that you need a healthy banking system. Banking system where people trust it, and I think you can look at the various surveys that are out there, American people don't have a lot of trust in the banking system right now. Or the banks. So I think it's got to be trustworthy, transparent, and it's got to be a community participant. It's got to understand local community needs and be able to apply its capital to those unique needs in a community.



Ted Simons: How do you get the banks to get that attention? How do you get them to focus on community needs on maybe some of these smaller, more individualistic loans?



Mark Stapp: Very hard to do. Because the controller of the currency, you know, and the federal government helps create underwriting guidelines. And again, those underwriting guidelines are guidelines that the banks have to follow if they're going to get loans approved. And we begin to become categorical in our statements. Rather than being unique about a unique development within a unique user, that's harder to do.



Ted Simons: And yet would you think the local merchant would be more committed to the local development, would certainly seem to have -- if you can focus on the local merchant or the local business idea, that focus would seem to be relatively narrow and you would have a better way of keeping up to date with it, wouldn't you?



Mark Stapp: You would. If your capital was focused in that direction. The banks are money making ventures. And the role of management in any business is to provide additional value for their shareholders. And so the management is being very skeptical about what they'll lend on, and sometimes they're not willing to take that risk on that very unique development in that local merchant. Because they may not carry the credit that they would be looking for from a national credit tenant.



Ted Simons: Sure. So what is your idea to change this particular dynamic? What do we do here? How do we get these banks more involved in the community? How do you get the disconnect to get back together?



Mark Stapp: Not easy to do. We've got community banks, but they are for-profit entities, and they're not always taking capital from the local market and applying it to just the local market. You've got credit unions, which are locally owned, not for profit, but they've got limitations on what they can lend on. And all of these have to be able to take loans and push them off their books in order to keep capital circulating. So they've got to play within certain rules as well. We've a community reinvestment act created in 1977 by Congress, was redone again in 1987 because of the S and L crisis and it's been redone six to eight times since then, it's been relocked at now. The purpose of which was to stop red lining, to loan for underprivileged people and underserved areas. Part of the solution is changing what community reinvestment act dollars can be spent on. So it's not just underprivileged, but it's community focused kinds of projects. I think that's one thing that would be helpful.



Ted Simons: Similar to this transit oriented Development that's going on along the light rail here in Phoenix, and Tempe, Mesa, the whole nine yards, we've had programs on that, and it sounds similar to what you're talking about.



Mark Stapp: We do have programs, there was a fund announced, I believe a $20 million fund with La Raza Development, and it is focused on providing some level of lending to fill the gap between what may be a conventional bank would loan on and what the project really needs. That's helpful. $20 million is a drop in the bucket. But it's a necessary start. We've got a billion dollar -- a couple billion dollars worth of public dollars spent to revitalize downtown, to put in a light rail system, to bring a University down there, and an objective to create what we would call a sustainable community. And that is predominantly looking at local kinds of things that make it unique, to provide the character, to make it a special place. And those are those little projects with local merchants and that's completely contrary to what lenders are looking for right now.



Ted Simons: How do you get -- last question here, and I've asked how we get those lenders to start looking at this, beyond that, is it financially -- obviously they've got their shareholders, the answer to the next question has to be yes -- is it financial feasible to take that approach?



Mark Stapp: I think it is. And I'm going to talk about something called shared value. Which is looking at a company's business objectives, not in terms of just increasing shareholder value, but in view of creating greater community value, which then also elevates their core business value. Because businesses are inherently tied to their local community. And if you separate out their business decision making from what's good with the community, then what you've done is you've got a disconnect between what's good for business and what's good for the community, and the fact of the matter is, they have to have things that are good for each other. So this idea of shared value, which was actually put forward by Michael porter, a professor from Harvard, who's probably the preeminent business strategy and marketing professor there is, is someplace to start looking for banks to rethink what their policies are and how they're going to implement those policies in order to embed themselves in communities.



Ted Simons: Interesting stuff. Mark, thank you so much for joining us. We appreciate it.



Mark Stapp: Thanks for having me.


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