July 23, 2009
Commercial Property: Feeling the Pain
Commercial property is the next big shoe to drop. We have been focused on residential real state. This crises is due more to a bad economy rather than irresponsible lending practices. Still, the pain will be great and the bottom quite a few years away, some say three, but I no longer listen to experts....so we'll see.
During the boom years, many loans were written that will begin to roll over between now and 2012. As much as 90-1.4 trillion is at risk when due for a number of reasons.
1. Vacancy rates: are up and will continue to rise as long as we are losing jobs. Many companies are going out of business. Commercial vacancy rates are at 20 year highs
2. Downsizing: Many companies are downsizing to meet the needs of a shrinking economy.
3. Lower Rents: The overall economy is driving rent rates down just as tenants are finding less need for large office space due to technological changes that are changing the city scape of our downtown districts.
4. Work at home: is lessening the need for office space and this will only continue to create a shift in downtown development. You can see many office towers and hotels offer condo space for downtown residential living as the market for commercial changes.
Commercial Equity and the Banks
Financing is tight because the banks themselves have so much residential inventory and are carrying loans that cannot be resold. The financial markets have seized up and their are no buyers for their collateralized mortgage securities. Add to that declining values in the foreclosure portfolios and it follows that when the commercial loans come due for a roll over that the lenders will not be stepping up. Declining equity, rental income, frozen markets and an unwillingness to take on risk at a time when the top priority of lenders will be to re capitalize and strengthen their books.
General Growth Properties
This is the shopping mall giant that filed for bankruptcy after lenders refused to refinance 27 billion in debt. Lenders have regained their business sense and will look to make healthy loans and keep a mindful eye on their own balance sheets. Some estimate that by 2012 the line of debtors will be 1.8 Trillion dollars long.
Private Equity Lenders
The biggest REITS with cash on hand will no doubt, position themselves to pick up distressed commercial property on the cheap. Some REITS are going into the stock market and offering new stock. The money they raise will be the war chest for buying distressed commercial properties. Investors are noticing. REITS that are cash heavy and are positioned to take advantage of a terrible commercial market are already doing well. The all return index, an index of 114 REITs is up 28% in the second quarter. REITS are betting on a recovery, even in the midst of a continuing downturn that may not have seen the worst. New alternatives to REIT investments are also cropping up, generally we see new products in up markets, I think we have some early positioning for an eventual upturn. This smacks of great expectations and gives me hope we will get through this....
Thanks for Reading
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Posted by Howard at Thursday, July 23, 2009