Glenn Fuller Quoted in “Default Could Tarnish US RE Market’s ‘Safe Haven’ Status”
Brutzkus Gubner Partner Glenn Fuller was quoted in Kaitlin Ugolik’s Law360 article “Default Could Tarnish US RE Market’s ‘Safe Haven’ Status.”
Law360, New York (October 15, 2013, 7:39 PM ET) — If Congress fails to reach a debt ceiling deal this week, the impact of a potential default on the value of the dollar could remove the U.S. from the top of the world’s list of safe places to invest in real estate for the foreseeable future, attorneys say.
House Republicans floated a new plan late Tuesday that would raise the debt ceiling and reopen the government while adding some exemptions to the Affordable Care Act, but the planned vote died by the end of the workday, with no alternative in sight.
This brinksmanship has the real estate community on edge, with experts concerned about the potential for interest rates to spike and, in the longer term, for investors to lose faith in the stability of the U.S. economy and the dollar, which have, despite many ups and downs in recent years, remained a “safe haven” for investment in real estate and other U.S. commodities.
“The commercial real estate markets need predictability in order to make the long-term commitments of capital and credit needed, and what we have been seeing — and probably are going to see for some period of time — in Washington is really not helpful to those markets,” said Geoffrey Mitchell of Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor LLP.
The main short-term concern is with interest rates, which many attorneys believe will rise sharply if the government defaults on its debts, restricting access to credit and generally slowing economic growth.
Calling the potential impact “horrifying,” Mitchell and others said the most immediate impact would be felt by developers currently looking to get financing for a project or a purchase. Anyone trying to line up commitments for a future project will likely face potentially prohibitive rates, if only because lenders won’t have anything to convince them with certainty that the dollar will be worth the same tomorrow as it is today.
Attorneys said that while they were still quite busy with deals that are already underway, things are slowing down in the way of new deals for many, as developers pick off the more marginal projects in an effort to reserve resources in the case of a default.
“The fear out there is that if this doesn’t get resolved soon, it will create uncertainty, providers of debt won’t want to make loans, and we don’t know what the interest rate environment will be. It’s the worst possible perfect storm for the real estate market,” Glenn Fuller of Brutzkus Gubner LLP told Law360 on Tuesday.
The anxiety caused by the lingering government shutdown and the congressional fight over the budget and debt ceiling have added a “new layer of risk” to the commercial real estate game that isn’t something that parties to a transaction would typically factor in, Fuller said.
The result could mean a “strangulation” on real estate activity, that will not only undermine the growth the industry has seen in recent months, but wreak collateral havoc on employment.
“As we’ve seen activity pick up over the last year, we’ve seen how many people are employed by the industry and what a great generator of wealth and jobs it is. I know they’re not thinking about this in Washington, but if they want to have a sustainable recovery, this isn’t the way to do it,” Fuller said.
The longer-term issue that has many real estate attorneys on edge is the viability of the U.S. dollar and the U.S. market’s place at the top of the safest places to invest.
U.S. Treasuries are the “backbone” of the world economy, on which real estate depends heavily, so many investors around the world are on the edge of their seats awaiting the outcome of this battle, according to Carl Schwartz of Hunton & Williams LLP.
The impact of the uncertainty could already be felt Tuesday afternoon. Senate Majority Leader Harry Reid, D-Nev., mentioned a potential credit downgrade in the morning, spooking the markets; the S&P 500 had lost 12 points as of the markets’ close, just after Fitch Ratings put the U.S. on a negative credit watch, but maintained its AAA rating.
This isn’t business as usual, Schwartz said, and the real impact is likely yet to come.
“It goes beyond what’s happening today; it is the dysfunctional government that sits in Washington, creating concerns around the world,” he said. “Even if they talk us off the cliff by the end of the week, the wearing away of the confidence in the government is going to take a toll.”
There’s also a sense among some in the industry, however, that the debt ceiling issue is simply “noise” that is masking the real problem of high government spending.
“There are a lot of ways the government can pay its bills without ever raising the debt ceiling,”
Guy Maisnik of Jeffer Mangels Butler & Mitchell LLP told Law360. “Politicians are playing chicken with this concept that if we don’t raise the debt ceiling, we’ll go into default … to me this is, at least at this point in time, a false issue.”
As long as the Federal Reserve continues to have faith in U.S. Treasuries, interest rates — the main metric by which real estate deals live and die — will remain steady, Maisnik said, pointing to the upward swing in rates after the Fed merely mentioned that it might pull back on quantitative easing earlier this year as an example of why the Fed won’t roll back this strategy.
The economy remains a private, capitalistic economy, budget deal or not, he said, so he’s not convinced that a problem with the debt ceiling will have a significant impact on real estate.
Even Maisnik, however, agreed that longer-term worries about the value of the dollar and how it will hold up in the global economy in the future, are real concerns.
“Will the world continue to invest in and buy our dollar? To me that’s a bigger, longer-term issue,” he said.
–Editing by John Quinn and Richard McVay.
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