The Credit Mess, Part 1: Commercial Edition

Denver-based real estate investment trust ProLogis owns, develops, and manages more warehouse space than almost anyone else on the planet, with more than half a billion square feet spread across North America, Asia, and Europe. Jeff Schwartz, who runs the company, says every day is getting to be a little more like the movie Groundhog Day. "Every day I wake up at 5 a.m., look at the Wall Street Journal online, and think about going back to bed. Then I call Japan and talk to our president there, and everything is fine," he says.

Then Schwartz calls Europe or China or any of the other markets under ProLogis's purview, and the news is generally pretty good there too. "Then I get to work and look at Bloomberg and go back to feeling bad again," he jokes.

The most worrisome headlines, unsurprisingly, are about the state of credit markets. Commercial property, long one of the healthier corners of the market, is starting to feel some of the problems that have decimated the residential housing sector over the past year. Schwartz says it's time for the government to step in before a lack of credit sends prices plummeting for American commercial properties, too.

How tight is credit?
We [at ProLogis] still have access to capital. The problem isn't if you're leveraged 30 percent or 40 percent. It's if you're leveraged 60 percent. There, financing has disappeared.

Why?
There's no trust in counterparties. There's no trading, no lending, no securitization, and the [commercial mortgage-backed securities] market is completely shut down.

Whose fault is it?
Most of the fault gets laid on investment bankers or originators of subprime mortgages, which is probably not an inaccurate place to lay blame. But placing blame doesn't help resolve the issue. We need to create some conduit or mechanism for the massive amount of securitization. Philosophically, I'm very free market. But in this case, I think you need some government intervention—the sooner, the better. The sooner you have a solution, the less draconian the problem is, and the easier it is to fix. It becomes increasingly complicated.

And the economy's slowing. Has that hurt your commercial business?
We have yet to see a significant decrease in demand. Occupancy remains above 95 percent. Overall, supply and demand are in balance in the industrial sector. As of today, we've seen very little subleasing. Inventory levels are very low. Obviously, a significant slowdown in the U.S. economy is not good for anyone. If the crisis can be alleviated in relatively short order, the fundamentals are strong.

Is the commercial market as vulnerable as the residential market?
There's been a lot of speculation and sensationalism about commercial properties following residential properties. The similarities are almost nonexistent. You had a significant overbuilding issue on the residential side. Again, no one is immune to a significant downturn. Commercial real estate is a victim of the impact to the subprime residential market, no different than retailers or most of commerce within the United States. But I fully expect that when we come out of a recession, our sector will come out very strong because we're going into it with supply and demand in balance.