Restrictions on commercial real estate loans have many predicting another collapse of stock market
In 2008, the first serious blow to the economy came when the residential real estate market collapsed.
Wildly inflated housing prices and risky mortgages imploded the system, touching off the recession that has affected every corner of the economy.
In the aftermath, housing prices have plummeted. What has risen is the average time a house spends on the market before it’s sold.
RISMedia, a real estate information systems firm, recently released figures that show home values dropped nearly 4 percent nationwide in the first quarter of 2010.
And while it arrived late to the recession, commercial real estate values are following the same trend.
Moody’s Investor Service said in late June that, while nationwide values inched up 1 percent in April, the aggregate value of commercial real estate in the United States is down 41 percent since October 2007.
“I don’t know that we’ve bottomed out yet or even stabilized yet,” said Nancy Lane, owner of Nancy Lane Commercial Realty in Jackson.
Compounding the problem is the mechanics of a commercial real estate loan. Typically, home mortgages carry average terms of 25 to 30 years; only the riskiest mortgages have a balloon payment.
That’s not the case with commercial loans. They usually require a 10 to 15 percent down payment and are almost always subject to three- or five-year calls, in which banks begin to demand the balance of the loan.
That could create another economic disaster, in much the same way the housing market did two and a half years ago.
“I’m a little worried about that,” said Lane, whose company lists properties across the state. “I really work hard not to be negative. I know there’s every opportunity in every market. What I’m seeing is some owners who can’t afford to get rid of the property, because they’re underwater on it.
“In 2011, there’s a couple trillion dollars (nationwide) in real estate loans that are coming due. They’re going to have to be refinanced. That’s the mountain that’s ahead of us. We’re already seeing the banks take back properties. As a matter of fact, we have a couple of listings that are bank-owned. The banks are just looking for what’s owed on the property. And there may still be some adjustment to be made on that as we go down the line, but we’re just not there yet. Hopefully it doesn’t happen all at once (like it did with the residential real estate market.)
“There’s been a lot of people who have lost a lot of net worth. The ones who have been in the business a long time know that they have to do things a different way. I’ve got a number of clients who are in a desperate situation. They’ve lost a ton of value in their property.”
Lane said one of her clients has had a piece of property on the market for two years, and it originally listed for $1.2 million. Now listed at $500,000, it still isn’t sold.
“That’s one of the worst situation,” she said. “We just have no control over this, which is the worst part. I tell my clients all the time that they didn’t do anything to cause this. They’re just a victim of the market.”
Lane did allow that there is more interest in the commercial market than there has been the past year or so. What continues to hinder any significant progress, though, is the same thing that has stagnated the residential market: gun-shy lending practices.
“We’ve had several things fall through because the buyers couldn’t get financing,” she said.
Sam Ford is a commercial real estate for Coldwell Banker Alfonso, which has offices up and down the Mississippi Coast, home to one of the state’s largest concentrations of commercial property. Like Lane, he has been in the business more than 30 years.
“A lot of the properties are tenant-driven, like your strip centers and single-tenant users,” Ford said. “The rents are down, so values are down. We absolutely have a ton of vacancy on the market, which is driving prices down, as well. Prices are down 25 percent from a year ago. I’ve got sellers that are coming off that much and still can’t move it. In some cases it’s more than that. But 25 percent is about the average.”
Lane and Ford agree that a complete meltdown similar to the one the residential market experienced is unlikely to happen to the commercial market, though it’s not completely out of the question.
What is certain is that until the job market recovers – the nationwide unemployment rate for June, according to the U. S. Department of Labor, was 9.5 percent – commercial real estate values will remain stagnate at best, and properties will remain on the market for longer periods.
“I don’t think we’re going to see a turnaround because (when more people have jobs) that’s when the stores start opening,” Lane said. “Until then, I don’t think we’ll see any improvement.”
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