Commercial Real Estate in a Crystal Ball

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Typically the performance of the commercial real estate market in the United States trails behind the rest of the economy and the residential real estate market by at least one year. After watching the painful decline of the US residential real estate market over the past year, many industry watchers are wondering what the future holds for commercial real estate.

Examining all of the facts surrounding the current commercial real estate market begins to paint a dismal picture, albeit one that is tinged with hope. Unfortunately, optimism doesn’t seem to extend to the vast majority of commercial real estate owners who financed their properties using commercial loans that become due in 5 or 10 years. The hope that remains in the market is in the sole possession of institutional and private hedge funds who have been buying the notes on the properties at steep discounts, sometimes up to fifty percent of the notes face value. This will leave many office building, high rise and apartment building owners in the position of having to renegotiate their mortgages with venture capitalists who may have no interest at all in the seeing the owner maintain possession of the property.

Prognostications and facts gleamed online that paint a gloomy picture for commercial real estate:

  1. The commercial real estate market will have to absorb price declines of at least 10 percent before it can begin to recover and may require slippage of more than 30 percent, according to a poll by LoopNet, an online commercial real estate marketplace.
  2. The biggest obstacle to recovery, identified by 46 percent of respondents, is capital.  Economic uncertainty and its commensurate influence on asset pricing was cited by 29 percent of respondents as top obstacle, making it the second biggest damper on recovery, followed by differences in pricing expectations between buyers and sellers, cited by 23% of respondents.
  3. Nearly $73 billion worth of commercial real estate loans are in some level of financial distress, according to Real Capital Analytics.
  4. U.S. commercial real estate prices fell 10.5 percent in the first quarter and 12.2 percent in 2008, according to British real estate data and analysis provider IPD’s first analysis of the U.S. market.
  5. Nationwide, the biggest drop in funding – 88 percent – was for hotels. Lending through mortgage-backed securities fell 96 percent from a year ago and bank loans for commercial real estate slid 80 percent, the Mortgage Bankers Association group said.

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  1. This is a great post and really puts everything in perspective. The distressed deals will surface, however people would prefer to buy a little too late than buy too early and risk overpaying for an asset.

    It’s an exciting time and I’m looking forward to see how things play out.

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