BiggerPockets

Does anyone have an opinion on the commercial real estate crisis and which areas of commercial it will have the most significant impact on?

Personally, I do not expect apartment buildings to be hit as badly as office and retail space. Rising vacancies in office and retail is largely due to a lack of consumer spending, lay-offs and business downsizing. However, as a result, won't these lay-offs (and high foreclosure rates in homes) cause consumers to downsize from their houses and condos to apartments, and increase occupancy levels in multifamily buildings? That's just my opinion.... I'm not an economist.

Thoughts?

The rental market here in Denver has slowed from 18 months ago. The lower end apartments appear to have been really slammed. No formal data, just observations from all the "free rent" and "$1 move in" signs on these buildings.

Commercial loans commonly have short balloons or rate resets. I suspect many owners bought or refinanced these during the bubble, assuming rents and values would continue to increase. When their loans reset or balloon, they're going to have a hard time refinancing at a high enough new loan amount to pay off the existing one.

Lender remains very tight. Perhaps it will loosen in the next few years, perhaps not.

The US national debt is skyrocketing. One of the methods to pay down this debt is to inflate the currency. When inflation kicks in, interest rates rise. Now, I think there are some pressures that may tend to hold inflation in check. Specifically, the large number of boomers who are nearing retirement and have had their portfolios decimated by the crash, and therefore don't have as much spending money as they did. The trend toward frugality, created at least in part by the inability to borrow cash, will also tend to dampen demand and therefore prices and inflation.

Nevertheless, it does appear there is a convergence of factors that point toward higher default rates among commercial borrowers. You may be right that commercial and retail will be hit harder. But I think a lot of the poeple will end up in SFR rentals rather than apartments. One of my tenants has all three of their adult children living with them, and my adult kids are living with me. In better times, all these kids would be living on their own, and likely in small apartments rather than a single large house with their parents.

I think you are right Richard, retail and office space will be hit harder than residential. People must live somewhere and there is a lot of truth in your theory that a bad economy trickles people downward into rentals. However, the truth is (as Jon said) that people are doubling up (and more) even now and that is likely to increase in the future. I currently have 3 families living in a one bedroom apartment. They pay the water and are taking good care of the unit, so I'm not saying anything. However, I am seeing that happen in many of my rentals as people increasingly can't survive on their own.

If the Bush tax cuts expire (thereby causing tax increases); cap and trade drastically increases utility costs and the cost of goods generally; socialized medicine is voted in (at a HUGE cost); etc the pressure on people will grow exponentially. The average worker is already severely stressed and won't be able to take much more. The standard of living in the US is going down and that WILL affect the rental business. The only trick is figuring out exactly how!

I agree with the opinions here. As a few of you have pointed out, many people are moving in with family and friends and as Brian said, some are leaving the area completely.

With that said, some (or a lot) of this is local. When people move out of one area they are obviously moving into another. As investors, we need to ascertain where that location is. Real estate, as we all know, is very local. Each local market runs its own cycle and each market is in different stages of that cycle at different times. While one location is severly hurting, another may be an emerging market where economic development is occuring, jobs are moving into the area (well, ok, this one's a bit of a joke right now), or people are moving there to take advantage of lower costs relative to other cities.

Like Mike stated, the tricky part is figuring out how events in the macroeconomic environment will affect our local markets (and even more difficult, the timing of these effects).

In closing, this is still a time to invest. I'm seeing a lot of great prices out there. Will the prices go even lower? Sure. But that doesn't mean they still aren't steals for a 10-15 year investment horizon. I'm a buyer.