Photo Credit: Can Pac Swire || Beautiful Seattle skyline. Unlikely to suffer much damage in the next commercial real estate panic
I have often said before things like “If you want to understand the liquidity of a security,look at the underlying assets.” Or, as I tweeted today:
Almost every asset is liquid in a bull market. Only the highest quality assets are liquid in a bear market.
In the WSJ article referenced, there are equity real estate partnerships that are restricting distributions to holders wanting cash. For many classes of real estate in this C19 environment, particularly offices and retail, cash flow is depressed, and some can’t pay their debt obligations.
So, is a real estate partnership liquid? No. Is commercial real estate liquid? No. Are the loans to commercial real estate liquid? No, but the Aaa/AAA portion of securitizations may be somewhat liquid because defaults are unlikely to affect them.
Be careful with what you own. An asset can’t be made liquid by putting it into a trust with other assets that are similar to it. Yes, in the short-run, the shares of the trust may be liquid in a bull market, but the moment that the economics becomes unfavorable, the liquidity will cease.
And so, to the institutional investors that buy these partnerships, I say this: Only buy these if you can hold them through the periods where distributions will be halted. Yes, it’s a tough criterion, but you need to manage in a way way that allows you to use your liquidity optimally. Overdosing on illiquid assets will never be the right answer.
Another way to put it is this: you never want to be in a position where you are relying on another entity to make a payment. Given that credit stress is correlated, all lenders must be cautious. You can’t rely on the law of large numbers.
The lockdowns were a cataclysmic mistake. There is a hotel near me that went into default a few months ago (the creditors filed to foreclose), and the case went to trial last week. The lawyers for the hotel arrived to court late, handed the keys to the creditors lawyers and wished them luck.
Not every debtor will be as blunt, but this is not an isolated incident.
Lots of residential mortgages are months overdue. Lots of rents haven’t been paid in months. So either throw thousands of renters into the street, or the landlords default. Cities were bankrupt even before they attacked their own tax bases — foreclosure is not viable.
Mom and pop restaurants. Small businesses. The list goes on and on and on.
The lockdowns were a horrible mistake, not a temporary liquidity issue. Central banks might be able to fix liquidity, they can’t fix stupid and insolvent.