Please Comment: What Will Happen in Commercial Real Estate in 2012 and 2013?

Question

Commercial real estate foreclosures aren’t going away in 2012, experts say. Most believe that the recovery will take at least a couple more years on the commercial side. The residential side is another story altogether of course. But what do you think about the slide and recovery for commercial real estate? Please share.

Commercial loans, unlike home mortgages, are paid back over short durations. Five-year loans made in the final months before the financial crisis will come to term in 2012 and 2013, and conventional lenders may not be willing to restructure the loans when they come due. This presents an opportunity for private money and bridge loan lenders to step up and help refinance some of these loans. But what does the next 2 years hold for commercial real estate?

Please share your comments below.

Darryl Dahlen · Answer

I'd love to write a long response as this is a topic of interest to me, but I'm short on time right now so I'll keep my thoughts brief.

In general, the commercial sector is wrestling with the mess it's in due to property depreciation that has affected many states, declining business revenues, and borrowers who are often in a weakened financial state.

To add to the problem, you have lenders who are dealing with fixing their balance sheets, trying to get rid of toxic assets, and in some cases, being watched/managed by the FDIC.

When you factor in the billions of commercial paper that is coming due just this year alone, you have a real mess.

However, banks seem to be more willing than before to take a haircut on a loan if they really want it off their books. Partly because it's often to their benefit and partly because sometimes the FDIC is looking over their shoulder.

For some borrowers being offered a reduced payoff often isn't enough. They still need to disclose their business financials and be credit worthy. Unfortunately, for a lot of borrowers they just don't pass muster which leaves them in a very precarious position when trying to secure a new loan.

It's going to be interesting to see what happens as the segment of borrowers who need to find a new loan, but cannot qualify for one grows.

So much for brief, lol.

Darryl Dahlen · Answer

Personally, I don't see bridge or hard money lenders playing much of a role in assisting with commercial workout scenarios.

Bridge financing is almost always just a temporary loan until the it can be paid off via an exit strategy (which is usually the sale of a property or another loan from a permanent lender).The key component with a bridge lender being that there is already a valid exit strategy in play PRIOR to them funding their loan.

When you have an borrower who is dealing with declining property values, shaky personal and/or business financials, poor credit, etc. there won't be a takeout lender in play given the borrower is going to have a hard time securing another bank loan. This results in what I call "a bridge to nowhere".

As a result, most bridge lenders would pass on these types of loan requests. They're not going to risk their money on the off chance a borrower might secure takeout financing at some point down the road.

Also, bridge financing has terms fairly similar to hard money. Even if either were offered I think most borrowers would balk at the rates and points involved.

That, and the LTVs that either lender offers would almost always be prohibitive. If someone is going through a commercial workout they're most likey not going to be at 50-65% LTV, which is where bridge and hard money lender operate.

Corey Dutton · Answer

Darryl Dahlen Thanks for the great insight. This is so true. I'd like to hear more from you on this topic.

Bridge lenders and hard money lenders will have to step up to the plate and fill in the gaps. The problem with depreciation really can't be solved by private lenders though, that's a problem for the borrowers. I don't envy them. In one of my recent discussions posted on this forum, 'Interview with a Banker,' I refer to this dilemma.

Another thought your commentary brought to mind is how so many businesses are moving to a more virtual set up so they can cover cost? What is the future of office with this in mind?