In previous blogs, I’ve written about the potential perils of lending, credit, and capital markets, and have asked the question: As the Economy Stabilizes, Will Commercial Real Estate Markets Worsen? I also discussed how investors and corporate occupants have recently been successful in buying office buildings for One Year’s Rent!
With $1.4 trillion in commercial debt expiring and in need of replacement over the next three to four years, many of us in the commercial real estate industry are asking ourselves: “If the next shoe drops in commercial real estate, will the bottom fall out of the economic recovery?”
Let’s consider some of what’s going on:
- Securities markets remain volatile
- Credit markets appear to be moving slightly, but are doing so cautiously
- Europe? Don’t get me started!
- The BP oil spill debacle in the Gulf of Mexico? Too many bad things to say here about too many people!
- Banks are still not aggressively lending for commercial real estate (Loans-to-value, recourse, and other important metrics are loosening, but are still rather challenging)
- Despite a large portion of the nation’s commercial real estate being owned by institutional investors, the majority of commercial properties are owned by private entities
One of the challenges in jump starting commercial real estate markets, that differs from the last declining real estate cycle, is that a majority of previously placed commercial real estate debt was securitized. Replacing such debt now, often requires arduous negotiations and decision-making on broad and deep levels. Challenges associated with time and cost of restructuring securitized debt has proven overwhelming to some borrowers, forcing foreclosure and deeds-in-lieu of foreclosure actions.
Some banks, becoming saturated with delinquent loans, non-performing properties, pending foreclosures, forbearance, and foreclosure avoidance procedures, simply will not or cannot return to lending in the near term. They have become, in essence, property disposition servicers. We’ve seen that before…can anyone say “Resolution Trust Corporation”?
In the current environment, banks and other lenders are more likely to lend on fully leased commercial properties. Such properties represent the minority of those seeking funding. Other lenders are focused primarily on residential properties, and are offering loan terms that are considerably more favorable than those available for commercial properties. As a result, many commercial investors have moved into residential real estate investing.
How will the economy work its way through these challenges? What must occur in order for commercial real estate markets to truly stabilize? Can banks simply lend their way out of this? Will recovering capital markets catch that other shoe? What are your thoughts?
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About Real Estate Strategies Corporation
Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to finance and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew Zezas, RealStrat’s clients engage the firm when acquiring, disposing of, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Follow CFO Studio at http://www.Twitter.com/CFOstudio.
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