Is the Second Wave of Real Estate Crisis Hitting the Commercial Property Market?
-
A LinkedIn member, Elaine M. Lyles, posted a July 12th news article that I wanted to start a discussion on.
The article that Elaine posted from the Washington Examiner is titled, “Second Wave of Real Estate Crisis to Hit Commercial Property Market.”
The author, William Flook, seems to have no idea about what’s happening in real estate. The article asserts that the ‘second wave’ of real estate crisis is ‘about to hit.’ This is like saying social media is ‘about to hit.’
The author of the article pins plummeting commercial values and the absence of financing options as the key catalysts for a “second real estate crisis.” Although the author is correct about the catalysts, I think it’s just been one big real estate crisis, and not a crisis number 1 and a crisis number 2. Would anyone else agree, disagree on this assertion?
One interesting thing to note from the article, was the premise behind it. The tax man is finally starting to feel the pain of declining commercial real estate values. This was pointed out by another LinkedIn member who commented on this article, Todd Phillips, Managing Director at Halcyon Equities.
Investors, private lenders, and hard money lenders have all been conservative about their investments in the commercial sector for quite some time. Demanding lower and lower loan to value ratios and highly favorable positions of leverage on some of the choicest properties; this has been the norm with most of my private and hard money lenders for the past year.
More and more commercial property owners, seeking to refinance their commercial loans, are having to seek out a hard money loan instead of a conventional loan. Many of them have multiple commercial properties and an extremely high net worth. With the ever-shrinking number of loan products and lenders, a hard money loan can be the only option for even the biggest commercial players right now.
Any further comments on the “second wave of real estate crisis,” the topic of this article?
Posted by Corey Curwick of Private Money Utah on July 29, 2009 – Leader of LinkedIn Group: Private Money Network
To access previous discussions: http://www.PrivateMoneyUtah.com
Leave a Comment
July 30th, 2009 at 9:55 am
I won’t argue on the semantics of calling it a ’second wave.’ I see a significant overbuilt situation in my local market in the Phoenix area. I see many empty facilities – many built in the last 18 months – as well as notice many retail and other offices closing. This latter development is ongoing and will continue for the next 3-6 months in my opinion.
The fact of the matter is that this is tied to the residential real estate sector as well. How? Because more people are underwater than one might think with their homes. Add in credit cards and other debt and more people are falling behind. I sometimes tell people that if everyone walked out of the homes and stood in their driveways with a little meter that had Green-Yellow-Red to represent their financial condition, people would be shocked at what they would see. People don’t talk about the extent that they may be in financial trouble but it is there in my opinion.
Tying this back to the commercial sector is that as a result, people are pulling back on spending like never before. Need a new car? They will buy a cheaper or more efficient one next time. They are slowing down purchases as well as the rate of maintenance expenses where they can. This means that less is being spent on restaurants, retail, and other commercial venues. Small businesses are impacted and as a result, close. This leaves lease space empty which puts pressure on the property owner. Eventually, the property owner is faced with pressure from the overbuilt situation and the loss of tenants and has to consider reducing rates. Depending how far this goes, the property owner may be faced with bankruptcy as well, especially if they can’t afford to be competitive with their lease-space.
This is a climate that has evoked a judgment on new business ventures like no other recessions we have seen – ‘why would someone possibly start a small business or other business venture right now?’ That’s not to say that a new venture can’t be successful, but this climate will be punishing for most that try.
Despite stock market upticks recently and suggestions by the Federal Reserve that there is light at the end of the year, this is a market whereby substantive corrections are occurring. These corrections aren’t six months in length but much greater. I would argue that we are only halfway there with questions as to whether fundamentals have changed enough.
July 31st, 2009 at 7:58 am
As a structured finance professional that has worked on the buy-side, sell-side and rating agencies doing CMBS, RMBS, ABS, CDS, TRS, ABCP, SIVs and just about every other acronym that has hit the wall, whether you want to call it a first wave, second wave or tidal wave is largely semantics.
What most don’t yet understand is the true scale of, for example, losses in the insurance or pension sectors, government intervention to prop up the financial sector but not the real economy, diminished global GDP from the slow-down in the velocity of money from a lack of structured finance and how all of these and other factors will likely lead to a diminished standard of living, etc.
Green shoots? Not to be a nay-sayer, but amongst the talking heads I still only see withered weeds…