The Crisis Among Us

[Richard Lorenzen]

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?

[Jon Holdman]

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.