The most read article posted on Real Clear Markets recently was one from Forbes with an idea about how to move capital trapped in the real estate market into more productive sectors of our economy.
Here’s an outline of the article:
- Problem: Underwater loans for commercial properties that are either overbuilt or vacant.
- Goal: Convert ‘in the red’ properties into green space and hold for development.
- Solution: Permit banks to deposit some of their excess real estate securities with the Fed, remove those properties from the market, convert to green space, and hold until the market recovers. A $200 billion land bank fund, provided by the banking system and backed by the Federal Reserve, would be established to help finance this conversion.
- Effect on Fed: The Fed would be shifting some of its Mortgage Backed Securities (MBS) purchases to new Land Backed Securities (LBS) – long-term assets backed by the eventual redevelopment of most of the green space. This would be a straightforward way to redirect capital out of bad investments and eye sores like dead-end malls, empty stores, and vacant factories, so that the capital can be redeployed into our new asset-light economy.
- How this differs from TARP: The stimulus money changed nothing. Jobs were protected but not stimulated. No one gets anyplace faster, no new productivity improvements were generated like the Interstate Highways did. Stimulus projects were not transformational. Converting real estate to green space and freeing that capital would have three positive effects.
- Direct job creation for demolition and green space conversion.
- Strengthening the banking system by removing bad real estate loans so banks can make new loans.
- Real estate owners will spend and invest more, knowing their properties have stabilized in value.
The article by Michael Messner — who runs a hedge fund, Seminole Capital Partners — is copied in full at end of post.
Forbes Op/Ed — A Monster Real Estate Paradigm Shift Demands A New Direction for Capital by Michael Messner
Things have changed. All across America powerful Schumpeterian gales of technological creative destruction, along with acute aftershocks from the 2008 financial crisis, are radically and quite literally altering the physical landscape of this nation.
We are witnesses and participants to a perfect storm of enormous and unstoppable trends triggered by the Internet, by Americans downsizing their lifestyles and increasing their savings, and of dynamic technology displacing capital intensive, asset-oriented investments. As a result of this sweeping sea change, we face a trillion dollar glut of commercial property threatening our communities, businesses, hundreds of small and mid-sized banks, as well as the FDIC.
Evidence of this threat confronts us on all sides. In this new American economy, strip malls, once anchored by sprawling book superstores like Borders and Barnes & Noble, have become relics of a bygone era. Their 21st century counterparts—iPads, Kindles and Nooks—now rule the roost. A similar fate awaits iconic retailing behemoths like Sears and Kmart, which are closing their doors in droves across the nation, replaced by a swarm of online merchants like Amazon who are seizing a larger share of the retail pie. Meanwhile, unfinished malls littering the landscape—New Jersey’s “Xanadu,” Atlanta’s “Streets of Buckhead,” and Syracuse’s “Destiny USA”–with a total investment price tag of $5 billion—are finished. In other words, it’s bye-bye Blockbuster, hello Netflix.
There is no turning back. Consumers are continuing this accelerated migration away from conventional bricks-and-mortar stores and onto the Internet. According to a recent Forrester Research estimate, the U.S. online retail industry will be worth a whopping $279 billion by 2015. Contrast that with a mere $8 billion in online sales back in 1998. In this new economic framework, banks, with 50 percent of their assets in real estate are out—venture capital investing is in. Likewise, mark-to-model artificial wealth is out, productivity generated wealth is in.
Of the myriad economic consequences—positive and negative—of this irreversible, tidal wave of change, one has become crystal clear: America has been left with a glut of commercial property that poses a major threat to our economic well-being.
What is also clear is that the current approach to this threat is not working. Policymakers are trying in vain to prop up an old, dying economy with phony panaceas like more quantitative easing folly and other largely ineffective monetary policy programs. The Fed’s purchase of $1.5 trillion of mortgages is a case in point—the goal of course was to prop the housing market up, and yet housing prices continue to decline nationwide. To make matters worse, the Fed’s zero interest rate as-far-as-the-eye-can-see policy is delaying the inevitable by enabling banks to “extend and pretend” within the moribund economic framework.
What policymakers should be doing is adapting to these massive, irreversible trends. They should be developing programs that would actually support our evolving new economy and bid farewell to the old. No more expensive short-term patches. What we need is for the Fed and the Administration to unleash capital trapped in bad real estate to restart sustainable job creation and economic growth in this new, asset-light, Internet-based world.
Any strategy should be focused on one thing: getting capital out of the old economy, so that it can be invested in new and growing businesses in an asset-light economy. Specifically, we need to get capital out of the $30 trillion residential and commercial real estate market, so that money is available for the $20 billion a year venture capital industry and the $14 trillion stock market—the growth drivers of the new economy. As it stands, the Fed’s support of old, bad real estate investments is starving good, new investments.
Here’s an idea: Let’s permit the banks to deposit some of their excess real estate securities with the Fed, provided the real estate is “banked” – removed from the market, converted to green space, and held until the market recovers. A $200 billion land bank fund, provided by the banking system and backed by the Federal Reserve, could be established to help finance this conversion. The Fed could shift some of its MBS purchases to new Land Backed Securities (LBS) – long-term assets backed by the eventual redevelopment of most of the green space. This would be a straightforward way to redirect capital out of bad investments and eye sores like dead-end malls, empty stores, and vacant factories, so that the capital can be redeployed into our new asset-light economy.
Under this plan, hundreds of thousands of new construction jobs would be immediately created for demolition and conversion to green space. The plan would stabilize local property values and simultaneously remove bad loans from bank balance sheets. Banks could then apply their capital to new loans to support economic growth. Philanthropic entrepreneurship would be stimulated. Remaining property owners would show more confidence in the economy knowing their property values have stabilized.
We can learn a thing or two from the U.S. railroad industry: more assets don’t increase wealth, it’s the utilization of assets that increases wealth. Railroads eliminated 55 percent of their track over the last 60 years, yet tonnage handled has risen 5.3 times, for a twelvefold increase in productivity. Or how about Pittsburgh? They converted excess steel mills to parks and green space in the 1980’s. They city is now considered the most livable in the U.S. Meanwhile, Flint, Michigan invested $4 million in a land bank, holding excess property as raw green space, and saw a $100 million increase in the city’s property value.
The time has come to accelerate this country’s move to the new economy. It’s time to get capital out of underutilized, capital-intensive real estate, and into job creation built around new economy businesses. A simple $200 billion land bank fund would redirect investment from yesterday’s real estate developments to tomorrow’s new-economy entrepreneurs.
Michael Messner is the co-founder of Seminole Capital Partners and a Trustee at The Speedwell Foundation.