News of the defeat of the Treasury’s $700 billion bailout package by the House of Representatives rocked the commercial real estate industry. Shares of real estate investment trusts dropped a precipitous 6.85%, roughly in line with the 6.98% drop in the Dow Jones Industrial Average. Spreads on benchmark 10-year, 30% subordination AAA-rated commercial mortgage-backed securities widened by 30 basis points. Spreads widened by as much as 100 basis points on BBB-rated securities.
The top ten stocks holdings in the Vanguard REIT index exchange traded down along with other major indexes. Shares of Kimco Realty fell 4.77%, while General Growth Properties’ shares were off 16.66%. Fellow retail REIT Simon Property Group closed down 9.27%. On the office side, SL Green Realty Corp., New York City’s largest office landlord, was off 9.52% and Boston Properties fell 5.75%. Apartment REIT AvalonBay Communities dipped 6%.
Overall, CMBS trading volume was low. "Several [bid] lists were planned for today but it’s been postponed following the Treasury news. I don’t think anybody is doing any more cash trading," said one trader. CMBX spreads also widened following the news.
Reactions on the investor side ranged from stunned to angry. "I was very surprised," said one investor. "You wouldn’t think they’d take something to legislators that they don’t have the votes for." Another investor echoed the sentiment, "I thought they were going to pass something today...If they don’t do something swift and strong, it’s going to cost taxpayers a hell of a lot more."
The steep drop in stock prices is invariably fraying nerves. "It’s not panic, but you just sit there and blink and think, ‘Wow," a second investor noted, adding, "We’re past predictions right now. The rules of the road are gone." He added that his current strategy is to "think long term and not get caught up."
The investor added that the recently imposed "no shorting" rule may have added to today’s volatility, arguing that the absence of shorts decreased trading volume which leads to more volatility. He added, "[Stocks] wouldn’t have rallied as much before [the House’s vote] and wouldn’t have had as much room to slide."
Traders were not optimistic about tomorrow, noting that Tuesday serves as both quarter and month end. "The investors won’t buy because it’s quarter end and dealers won’t either. Sellers will be selling into a very thin market," the trader said.