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Barrack Says Real Estate in ‘Chaos’ as Laws Waived on Rent, Debt

Bloomberg logoBloomberg 4/24/2020 Erik Schatzker

(Bloomberg) -- Tom Barrack said the U.S. property market is in “chaos” and still on the verge of collapse because the federal government and local authorities are allowing renters and homeowners to skip payments because of the coronavirus.

“We haven’t had a crisis like this,” Barrack, chief executive officer of Colony Capital Inc., said in an interview Friday on Bloomberg Television. “We’ve never had one where we just have a government taking of revenue.”

The stimulus bill passed by Congress last month included a provision allowing borrowers to defer payments for as long as a year without penalty on federally backed mortgages. At the same time, cities and states throughout the country have suspended evictions and foreclosures to help the tens of millions of Americans who’ve lost their jobs.

Normally, lenders and landlords can use the legal system to enforce rent and interest obligations, but “all those options are out the window,” Barrack said.

A month ago, Barrack, 72, was among the first big real estate investors to warn publicly about the perilous state of the industry and to call for government intervention. He proposed an orchestrated forbearance, a “time out” in which any payments could be accrued onto leases and loans.

Many of the measures he sought then, including market liquidity from the Federal Reserve and delays in new accounting rules, were adopted. Others, such as a halt on margin calls by banks and a suspension of mark-to-market requirements on financing arrangements, weren’t.

Aid Programs

Federal efforts such as the Paycheck Protection Program and Main Street Lending Program are “difficult to utilize” for companies like Colony, which is structured as a real estate investment trust, Barrack said.

“We’re not using those,” he said. “We’re encouraging many of our borrowers and our users to rely on whatever subsidies they can get to continue to make their payments.”

Colony’s real estate portfolio was valued at almost $50 billion as of Dec. 31. Barrack said its digital infrastructure investments -- cell towers, data-storage facilities and fiber-optic networks -- are holding up best. Retail and hospitality assets are the worst performers.

In April, the number of Colony tenants who made rent payments was “amazingly good,” dropping only 3% to 5% from normal levels, Barrack said. He expects fewer will remain current next month.

Barrack, who first saw property prices collapse during the savings and loan crisis of the 1980s, predicted that big companies like Colony, which he said still has “plenty of liquidity,” will survive the recession and real estate shakeout.

“The people who’ll be crushed are the people who own the equity, the people who own bonds and debt, the pensioners,” he said. “At the end of the day, the government is going to have to step in and subsidize it all if people don’t go back to work.”

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