Is Commercial Real Estate Next?
Thursday, January 29th, 2009
Yes.
In The Huffington Post, Jim Randel wrote (in a story with the same title as this post) that he does not see wide scale defaults in the world of commercial mortgages. He also wrote that commercial borrowers have much more equity in their properties than do homeowners on general.
Unfortunately he’s wrong. Many (if not most) investors that bought stable commercial investment property in 2007 are “under water.” Property values have fallen that much, at least in the short term.
He was also wrong about commercial real estate being a market devoid of emotion where real estate values are a pure exercise in evaluating cash flow and solving for a target return. There is a tremendous amount of fear and uncertainty among commercial real estate investors, and this emotion is keeping buyers on the sidelines despite some exciting opportunities to buy at spectacularly low prices.
I’m also not sure I buy his assertion that it’s an easier decision for a homeowner to make to hand over the keys to his or her property to the lender, that they have less to lose than a commercial investor. A home is the biggest investment most individuals will ever make, and most (though I acknowledge certainly not all) put down a significant amount of hard-earned cash to buy those homes they are now losing.
He was right about some things, though. Mounting tenant failures will grow the amount of sublease space on the market dramatically in 2009, putting major downward pressure on rental rates. He’s also right that as commercial debt has been tight lately, it’s pushed property values down.
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