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POP! Goes Commercial Real Estate?

Not one to shy away from the bigger picture…..I take a look at the reality of the commercial real estate market we live in today.

There is a large over supply (empty space) of commercial real estate that will take years to absorb. In addition there are $1.3 trillion in commercial mortgage notes coming due in the next 3-4 years but only $800 million in debt capacity for these loans.

Wall Street will likely experience another crash in 2013-2014 unless something is done.  Traditional loans on commercial buildings used to go through banks.  Then in 2003-2004, Wall Street learned they could securitize loans and act as banks or alternative lending institutions.

This led to strong competition for loans, more people bought buildings and the balloon expanded.  But then it popped, values have plummeted and remain way down.  Most of these loans were made with ten year notes.  So unless things improve dramatically in the next few years, when the notes come due, they will be foreclosed, values will drop again.

That will then start a new wave of buying with good buildings going on the market at rock bottom prices.  One person’s pain is another person’s gain. Those who build cash reserves over the next few years will come out ahead.

So it is worth asking:

  1. What will another hit to the commercial real estate industry mean for Architects, Engineers, Construction firms, Brokers, Manufacturers and the U.S. Economy?
  2. What will the role of the Federal Government be to prop these industries up? Will we see an expanding public works effort or a steep decline as deficits expand and the pressure to contain costs increases?
  3. What can we do to prepare in case this scenario plays out as projected?
  4. What other scenarios are possible?

-New construction in many markets is down 90% from 2007.

-Unemployment for architects is close to 50%.

-Office furniture sales are back to 1992 levels.

-Unemployment remains over 9% and parallels to Japan’s lost decade of growth are being made in the financial trade journals.

-Each of the industries above is already going through major restructuring.

-We will have 2 to 3 years of slow and careful growth? Perhaps with the lessons of 2008 still fresh in our minds we’ll be ready for 2013-14.

Grim Reality ? Doom and Gloom? Cause for Hope?  Head Down, Blinders On…in the business until they drag my crusty behind away???  What are your thoughts?

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  • Bob

    Politics aside, and I think the politicians should step aside, we need a bottom, a reference point. If our knee jerk reaction to the impending issues is to falsely bolster up industries that should be allowed to fail, then we will be sustaining this recession/depression for another decade. Let things evolve and let the market resolve.

    • Bob,
      JOBS JOBS JOBS…no wait how about just creating work for people!!!

      • Bob

        Watching the pot wont get it to boil any quicker. It will be years before we see any robust job creation and it will seem like an eternity if all we do is focus on job creation, especially if you don’t have a job. Let’s keep our eyes on the deals. Create a baseline and there will be incentive for movement.

  • Duke,

    Great post, a lot to think about here! The “glass is half full” part of me thinks that much of the downside risk has already been taken out. Can values really fall any further? I just don’t know.

    As far as the crazy amounts of loan maturities, let’s hope the banks want to work with the holders, as we know banks hate being real estate owners.

    Perry

    • Perry,
      The banks say they don’t want to own…but do nothing with the assets ….at all. No user no value!

  • Michael Smithing

    I think the decade long recession is pretty likely because no one is actually willing to take the loss and get on with life. The sooner we can get to the “one man’s pain is another man’s gain” act in this play the sooner it will end. From what I hear of the US market, not many good assets have come on the market at rock bottom prices – and in Europe not even the really bad assets have come to market.

    The question I have after reading your post is who actually forecloses when the securitized loan comes due and isn’t paid. Is that the first real chance we have of getting away from banks working with lenders?

    As a broker I’m waiting for something to hit the fan so I can start making money again.

    • Michael,
      Well put….. love to make some witty reply but….you said it “As a broker I’m waiting for something to hit the fan so I can start making money again.”