Commercial Real Estate Financing Woes In Action  

Imagine I told you about an investment where you lay out $85 and then two years later you sell out for $140. Too good to be true, right? And yet that’s exactly what I’ve seen unfold not far from my house where the United Congregationalist Church had some land at 10th and G Northwest it wanted to redevlop as offices. Building an office building in the central business district of the nation’s capital is about as close to a no-lose investment as you can get. So how did a company wind up earning a 65 percent profit margin?

Well for starters, it didn’t take $85 in initial outlay it took $85 million. But the key thing is that with large-scale project financing a huge mess back in 2010, the Swedish construction and engineering firm Skanska was not only able to build the project it was able to finance it. That let them build while other projects were stalled and construction costs were low. Then on March 2 they sold it for $140 million.

This is an example of the kind of financing issues that I think are holding back multi-family construction. Very few people have $85 million to invest in a construction project. And it takes a while to build a building. So even if the underlying risk of the investment is in some sense low, you’re still sacrificing a lot of liquidity to put that much into a project. Given a skittish and probably undercapitalized banking system and real interest rates that are high relative to the Wicksellian equilibrium, you get underinvestment. One possible solution is for a cash-rish Swedish firm looking to get into a new market to self-finance. But the United States is way bigger than Sweden. We do have a lot of cash-rich technology firms in the United States, but I don’t think Apple and Google and Microsoft are going to start building apartments. People could start getting radically more ambitious with their Kickstarter proposals, but until that happens better monetary policy, however, is the more plausible solution. The idea of credit intermediation is that Apple’s cash (of which we have an excess) ought to be transmogrified into apartment buildings (of which we have a deficit) without the company needing to launch a new line of iApartments. But for that to work, the system needs to shoulder liquidity risk.