It should come as no surprise, but I am a HUGE proponent of the East Coast ports.  I have long held that they are closer to the population, and with the widening of the Panama Canal are extremely well positioned for future growth.

Well, in a recent white paper, Drewry Supply Chain Advisors lays out some fundamental reasons why East Coast (EC) and Gulf Coast (GC) ports will continue to steal business away from the West Coast ports.  Even if volumes remain the same, the EC and GC ports will continue to grow.  And this is not a short term phenomena.  Drewry sees these changes as “structural and long term”.

“Even if growth continues as strongly as it has in recent years, any new trade will probably pass the West Coast by.”

The East Coast ports continue to be extremely well positioned to handle the future growth the the new Panama Canal will enable.  Come to think of it, maybe the Panama Canal authority should be on my Christmas list as well…

The Wall Street Journal is reporting that a consortium of 20+ real estate trade associations is petitioning Congress, the FED, and the Treasury for a piece of the $200 billion lending facility established for consumer debt (credit cards, auto loans, etc.).  Their argument is that with over $530 billion of loans coming due in the next three years, they will need significant aid in refinancing.  Their argument continues that if the capital markets are not liquid enough to refinance, they will have to default.  Consequently, the banking system will have to process these assets, something they are not set up to do on this scale.  The encouraging part is that they aren’t asking for a freebie.  Instead, they are asking for the government to play bank and provide low cost loans to the developers needing to refinance.  That sounds admirable, but there is potentially a hidden cost (and handout) in there.

Let’s work through the math here.  The $530 billion of loans coming due were most likely underwritten at a loan-to-value of between 70% and 75%.  So, the presumption is that at the time of lending, the loans were secured by approximately $731 billion of assets.  In the next three years, when those loans come due, the owners will need to refinance and the deals will need to be re-underwritten.  As we are all aware, asset values have already fallen significantly and underwriting standards have tightened.  For this analysis, let’s assume that the values have fallen 20% and that 60% LTV is now common.

So, when it comes time to refinance, traditional lenders will be willing to loan only $350 billion to pay off the $530 billion in loans.  Who is going to come up with the $180 billion difference?  That would be cold hard cash that the building owners have to come up with – even if the government is the lender.  Now my assumption is that, under a bailout deal, the trade organizations would ask that the government issue new loans at the previous principal amount – a one for one issuance with no regard to current market value.  That would put the government making 90% LTV loans, assuming asset values don’t decline further.  Also keep in mind that this assumes all other things being equal.  We haven’t addressed a decline in occupancy, rental rates, absorption etc.  The 20% decline has been mostly in an increase in cap rates.

I don’t know about you, but that’s not how I want my tax dollars being used.  You?

(In the interest of full disclosure I should point out that I am a member of a number of the trade associations that have made this request.)