Commercial property Owners Beginning to walk away
As predicted, commercial property values have taken a beating in many parts of the country and as a result there owners are defaulting.
Just as the residential sector has taken a bath during the past 2-4 years in most parts of the country, it has been predicted that the commercial sector would follow .........and it is!!!!
Economically, this poses significant challenges to an already strained banking/lending industry. One obvious difference is the mere size of these loans that will be defaulting. They will easily dwarf the size of defaulted debt in the residential sector, based on loan amounts and gaps in valuation. Additionally, commercial loans, unlike residential loans do not have 30 year amortizations. Loans are set over a 15 year terms or terms that are usually much shorter than a traditional residential loan. Many are beginning to come due over the next 12-18 months and beyond.
Most banks are in no position or have the appetite to renew these loans, or renegotiate the terms of the existing loan, especially if it means that the bank will take a hit on terms, value, loan amount etc. Further complicating this challenge is the fact that many of the smaller commercial loans were underwritten by local community banks (often the most vulnerable). They are least capable of taking the kinds of losses that would adversely affect their balance sheets and subsequently this will increase the challenge of meeting the minimum loan loss reserves, forcing them to close. All of which will put further strains on the local lending community and the economy in general.
While individual property owners are busy trying to maintain and manage their own real estate plight, bigger economic challenges in the real estate market and overall economy lie ahead.
Finding creative forward thinking solutions to offset the next wave of defaults will be critical in minimizing the impact it will have on the US economy.
Just as the residential sector has taken a bath during the past 2-4 years in most parts of the country, it has been predicted that the commercial sector would follow .........and it is!!!!
Economically, this poses significant challenges to an already strained banking/lending industry. One obvious difference is the mere size of these loans that will be defaulting. They will easily dwarf the size of defaulted debt in the residential sector, based on loan amounts and gaps in valuation. Additionally, commercial loans, unlike residential loans do not have 30 year amortizations. Loans are set over a 15 year terms or terms that are usually much shorter than a traditional residential loan. Many are beginning to come due over the next 12-18 months and beyond.
Most banks are in no position or have the appetite to renew these loans, or renegotiate the terms of the existing loan, especially if it means that the bank will take a hit on terms, value, loan amount etc. Further complicating this challenge is the fact that many of the smaller commercial loans were underwritten by local community banks (often the most vulnerable). They are least capable of taking the kinds of losses that would adversely affect their balance sheets and subsequently this will increase the challenge of meeting the minimum loan loss reserves, forcing them to close. All of which will put further strains on the local lending community and the economy in general.
While individual property owners are busy trying to maintain and manage their own real estate plight, bigger economic challenges in the real estate market and overall economy lie ahead.
Finding creative forward thinking solutions to offset the next wave of defaults will be critical in minimizing the impact it will have on the US economy.
Comments (5)
We are investors in commercial deals and are beginning to see some movement in this area of real estate.
Ken Sheppard, over 14 years ago
All I do is commercial.For now what banks are dumping is mom and pop smaller C type stuff that has no chance of recovery.Larger core assets the banks are trying to workout the loans with the owners rather than taking huge haircuts. There are some larger properties entering the market but not in a massive wave yet for the appetite of the war chests waiting to snap up the deals.
Joel Owens, almost 15 years ago
This is an interesting post, I agree, I think this is the next MAJOR shoe to drop in the economy - which means a lot of opportunities for Investors.
Account Closed, almost 15 years ago
IMO banks are in a real catch 22 here. They can't really afford to hold onto these loans, but they are also trying to protect the balance sheet and ability to lend.
Account Closed, almost 15 years ago
Great post! Small regional banks are also where small businesses get their credit lines and such. The credit market will continue to tighten and economic growth will continue to suffer! Eek!
Bryan Hancock, almost 15 years ago