Tom Barrack On The Crisis In The Commercial Real Estate Market

Tracy Alloway (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

So Joe, I feel like we've hit probably all the major crunch points in the big market sell-off recently, except one.

Joe Weisenthal (0:29)

I'm not convinced entirely that we've hit all of them, but I do think we have hit several of the major crunch points.

Tracy Alloway (0:37)

Okay, the big ones.

Joe Weisenthal (0:40)

Okay, that's fair. The big one.

Tracy Alloway (0:42)

All right. But there is a pretty big one that is looming that we haven't talked about yet. And that is what is going on in the mortgage market.

Joe Weisenthal (0:52)

That's correct.

We've, you know, it's kind of interesting because, you know, there's a lot of compare and contrast to the 2008, 2009 crisis. We know that 2008, 2009 crisis more originated within housing and mortgages and then spread outward. This one was more exogenous. But eventually they kind of converge with some of the same pressure points because if the economy shuts down, people can't pay their rent at their mortgages.

Tracy Alloway (1:24)

Right, exactly. And we've already seen, well, people who can't actually pay their rent and some companies that are also saying that they just won't pay their rent. So Subway and that mattress company whose name I've forgotten, Mattress Firm, is that it?

I think they said that they weren't going to pay their rent either.

So clearly we're sort of getting to a point in time where there is going to be a big confrontation between landlords and their tenants. But the other thing that's happening is just widespread chaos within the financial system for mortgages itself. So we've had mortgage bonds, both residential and commercial, just plummet in value. And we've also had this thing where, as the bonds plummet in value, big banks start making margin calls on funding that actually financed those bonds.

Joe Weisenthal (2:19)

Yeah, that's exactly right. And of course, this too brings to mind prior periods of stress because there's always the question of, well, how do you make a mark in an asset during a period of extreme distress? What's fair? When are margin calls appropriate?

These are very difficult questions to answer, especially in some of the very illiquid, more esoteric parts of the market where there just may not be an obvious mark to go on during a period of extraordinary illiquidity.

Tracy Alloway (2:52)

Right. And at the moment, large parts of the mortgage market are basically illiquid. So today we have the perfect person who's going to talk about this with us. We're going to speak to Tom Barrack. He's the CEO of Colony Capital, one of the biggest real estate investors out there. He's also written a post up on Medium. Everyone should go check it out that sort of talks about the troubles in the mortgage market and also some suggestions from him about how to ease the pressure. So we're going to get into it.

Tom, welcome to the show. Thanks so much for coming on.

Tom Barrack (3:26)

Thanks, Tracy. Great to be with you and Joe.

Tracy Alloway (3:28)

So I guess just to begin with, could you maybe give us some color on what the mortgage market or the real estate market actually looks like at the moment?

Tom Barrack (3:37)

Yeah, of course, it's in chaos as is as most of our lives while we have this intersection of two crises.

The unforeseen and unknown coronavirus and COVID-19.

And for the first time in anybody's memory or history, a cessation of revenue. So when we look at the setting that we're in, a banking system that became well-heeled and structurally much different than the banking system that was the subject of restructuring in 2008

And maybe it's worthwhile just to look at the great financial crisis, which everybody uses as a metric against which to have some historic perspective as to what happened then and what we might do now, but a very different set of situations. The 2008 financial crisis really started in 2007 from an oversupply of everything and exogenous structural defects and financial instruments that were being created and were sent around the world, these weapons of mass destruction, which bundled mortgages, which gave individuals of residential consumption an addiction, and the same in the commercial mortgage markets and the same in the corporate markets.

So that collapse without wasting too much time on why and when had some of the same resolutions in that the Fed and the Treasury had to step in along with the arsenal of other regulatory bodies. So when we think about liquidity and banking, we today have a banking system and we have a non-bank system. We have Main Street and we have the capital markets. And for real estate, and most of your listeners are too young to remember, but prior to 1990, there was really no capital markets. Real estate was an investment by individuals. There was very little shared participation in commercial real estate. Lenders were life insurance companies, pension funds primarily, and your local bank would make a loan to you on a commercial project based on your business. But REITs had been invented, but not widely utilized. And there really was no such thing as commercial mortgage bank securitization. So on the capital market side, if you thought in four quadrants, you have public and private equity, and you have public and private debt. And what we're watching today is the public side, the benefit side of the public, which you had liquidity, you had transparency, you had broad participation, you had higher yield, so that the individual mom and pop was able to participate in things that theretofore they had never had the opportunity.