Commercial Real Estate...The Shoe is Dropping

Posted by Expert Gadget Reviewer on Tuesday, 1 September 2009

Listen close and you can hear the drumbeat...

"Commercial Real Estate is the next shoe to drop..."

This message has been playing in the background for at least the past three quarters, but all of a sudden it sounds like the volume is getting pumped up.

On several news sites this evening were articles about the pending tsunami in Commercial Real Estate (a phrase coined by a close friend and East Bay Commercial Real Estate expert).

From Commercial Property Executive: Economy Watch - CRE Default Rate More Than Doubles Since Last Year - points out that loans in default for the 2nd Quarter of 2009 are at 2.88%, up from 1.18% for the same quarter in 2008. They further forecast default rates climbing to 4.1% by the end of 2009.

From the New York Times: For Commercial Real Estate, Hard Times Have Just Begun - states that we are early in the process, and quotes an expert forecasting that, "As many as 65 percent of commercial mortgages maturing over the next few years are unlikely to qualify for refinancing because of the drop in values and new stricter underwriting standards..."

Finally, a different (more positive) spin on the same subject, from Experts: Cleansing Period Ahead, Bottom Near - puts a positive spin (as we did), on the fact that a lot of properties will be "forced" to change hands over the next two years as investors default.

What does all of this mean... Look for a sharp increase in the number of headline making spectacular Commercial Property defaults, followed by some equally spectacular purchases as the properties change hands. In the end, resetting property values to the current market valuation is painful in the short run, but necessary for all of us to prosper in the long run.