I was surprised by some of the comments regarding Dr. Doom AKA Nouriel Roubini and his predictions that we are not yet out of the economic woods, and we are most likely going to experience continued turmoil in our economy in general and real estate specifically.
To the point – it seems that everyone is now paying attention to the coming challenges with the commercial mortgage market. And who can blame anyone for thinking that the commercial market is on the edge, and will likely go right over the side in the coming 2 – 3 years.
Using Old Valuations Can Lead to Disaster!
Making this situation worse is the fact that most lenders are valuing the underlying properties collateralizing their mortgages at their original values (just like what is happening with residential properties), further forestalling the pending crisis in bank defaults. If banks revalued their portfolios to the real (current) values of their underlying collateral… it is possible the entire system would collapse. I found an interesting dialogon public radio amongst various experts regarding the pending (actually it has already started) commercial collapse that demonstrates that some people may have their head in the sand.
In my last article I cautioned investors who were not currently in the commercial investing side of things to tread lightly… and I will repeat it again… The commercial world has a very different set of rules than the single family world. It is an oversimplification to state that “commercial” investing is not a big deal… you just add more zeros… because each one of those added zeros represents significant increases in risk.
And to drive the point home… we expect that the experts, those running in the commercial world, to be very bright with a keen sense for managing and mitigating risk… yet if this were totally true, why did these geniuses buy, and overpay, at the very top of the market and not see this train wreck coming? And these are the EXPERTS!
So, bottom line… the experts are hoping someone less bright then they are will come along and bail them out. Don’t be that less BRIGHT person!
Article Author:
Peter GiardiniPeter has written 11 articles for us.
Visit Peter's Website: http://www.theclubmastermind.com
Peter is an active and successful real estate investor in the Baltimore Maryland region for the past 8 years and is one of the founders of The Club Mastermind a real estate investing coaching program focused on local coaches helping investors to perfect their game.
Joshua Dorkin
Charles Feldman
Ted Karsch.
{ 8 comments… read them below or add one }
Is is any wonder the commercial sector is dropping. They overbuilt just like new home builders and are now left with large surplus’s.
Can you point to some source material that shows that commercial lenders are in fact using old valuations?
Are you arguing that the commercial market ISN”T in as serious a danger as the experts are reporting? And if so, can you cite something that would support that? I only ask this question based on your statement in the first paragraph:
“it seems that everyone is now paying attention to the coming challenges with the commercial mortgage market. And who can blame anyone for thinking that the commercial market is on the edge, and will likely go right over the side in the coming 2 – 3 years.”
Iman Yusef-Yahya´s last blog ..REO Properties: 7 Must-Know Tips and How to Profit From Them
Iman – I’m pretty sure Peter was saying that the commercial real estate market being in trouble is a BIG DEAL.
(BTW – You may want to jump on Gravatar.com so you can have your pic posted with your comments here and on any other wordpress blog)
WOW… great comments.
Iman… as Josh mentioned I am arguing that the coming commercial fall is a big deal.
While there are some who don’t share that view… as referred to in the article… click on the word DIALOG in the middle of the third paragraph to see some of the views of the experts.
For Dave, in the same article here is the reference regarding banks and their current valuation methods…
” Hessam Nadji directs research for Marcus and Millichap Real Estate Investment Services in California. He says in the meantime, banks are holding the loans on their books at full value and employing a tactic you might call “delay and pray.”
HESSAM NADJI: The bottom line is lenders are, as a result, extending loans and trying to avoid short-term additional losses until they get stronger and have the wherewithal to start to process some of the undervalued real estate.”
I hope this helps to add some clarity to the discussion?
Thanks for clearing that up Josh and Peter. Josh for the gravatar tip.
Iman Yusef-Yahya´s last blog ..REO Properties: 7 Must-Know Tips and How to Profit From Them
Are these commercial lenders bound to change the way they do things?
Dave,
In many regards that already have. Just try to get a deal financed today. It seems no one… at least not the regulated lenders are lending at all.
As for how they are valuing their portfolios… only time will tell. I am predicting that on the residential side they will start to adjust their residential portfolios to reflect reality after the end of year reporting for 2009.
I don’t think the pain level is high enough on the commercial side and as long as the lenders can continue in their fantasy world they are going to.