Commercial Real Estate: The Iceberg is Melting Faster!


This isn’t a global warming post in any sense of the phrase. Unless, of course, it is your bank account that is melting away faster than you care for it to melt away. This post is a kinda-sorta extension of last week’s post in which I said a new wave of foreclosures is in the immediate future.

My statement was based on the commercial real estate market and lo and behold the very next Monday, Corus Bancshares Inc. was seized by the Feds. As it turns out, CBI financed a 377 unit condo called The Montage in downtown Reno. Several years ago the latest craze to hit this city was to take shuttered casinos – yes, casinos go belly up – and convert them into condo complexes.

This particular complex had units priced from $150,000 to more than $1 million. This was during the high flying years. Today these same units won’t fetch $10,000 no matter where they are located in the complex.

My youngest son was in the market at about that time for a dwelling. He liked the idea this complex was only two blocks from his job and he could walk to work even in the dead of winter, and not freeze before he got there. I went along to see what was worth $1 million.

My Impressions

As we toured the facility, several things jumped out. The factor we both felt was the “it’s not my home” feeling. Instead, we were overwhelmed with feeling like we were merely guests. That isn’t the only feeling that grabbed us but it was probably the most important. I’m not saying this is the reason the project tanked but I can’t believe we were the only two who felt that way.

The Montage wasn’t the only condo development being marketed during that period. The others have also experienced a complete lack of demand for their units. But, as of this writing, The Montage is the only condo to be foreclosed.

The others are waiting for the bad news. Their iceberg too is melting and they know it, but can’t do a danged thing about it.

Commercial Lender Loans

CBI didn’t just lend against condos. They also made loans against office and hotel projects. I don’t know how many loans they made in this area during this period but those projects, if any, must also find new sources of capital. In the current environment, all I have to say is good luck.

Given the Federal Reserve Bank, Treasury Department and the Office of the Comptroller of the Currency are now monitoring commercial lenders with a finer tuned eye, CBI isn’t the only company to realize seizure and sale. None of these agencies give advanced notice as to when and where they will pounce. Nor should they.

However, that leaves you and I, the investor, holding the bag should we find ourselves with a company like CBI as the lender. Maybe we didn’t invest a cent; maybe all we did was to be lucky enough to be the contractor for any of the various services they required. The lender goes belly up dragging the condo with it and our paychecks.

Ugh, not a warm fuzzy feeling.

In any event . . .

I realize my above scenario is a drop in the bucket compared to the housing foreclosure picture. However, if the commercial market moves at the speed of the home foreclosure market, we all may be looking at a lot of empty strip malls, commercial office complexes, condo units, etc. Watching this unfold in my backyard gave me a jolt. It made me wake up and reconsider several commercial units I was scoping out.

I’m not saying you should stop any foray you have planned into the commercial market. I’m saying you now are forced to take a closer at any lender to which you apply for a loan. Maybe, just maybe, you should ask them to fill out an application so you can determine if they are, and will continue to be, solvent. Maybe, just maybe, it is time for the investor to invert the lending business model and make the lenders pony up the same data we are asked for.

Regardless, a wide open mind is still the best asset one can have in this market. We can no longer be complacent about any aspect of our business.

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  1. I just called the Montage and asked about the price for their cheapest units. I was told that their 610 sq ft studio was just dropped to $155,000 because most offers were 20% below asking — as a result, they reduced the price 15%. It sounded like they would consider any offer, however, I’m not sure that they would consider an offer of less than $10,000.

  2. I guess I should have prefaced my $10,000 remark with the word “rhetorical” so people would have been able to see my tongue squarely in my cheek. As for the $155,000 amount, good luck to them. My gambling money says that amount too will be discounted by the end of the year. I think Tyler hit the nail on the head – office space will be available at exceptionally reasonable prices.

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