Deja-Vu… All Over Again! This time in the Commercial Real Estate Market
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.
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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!