I am of the personal belief that we are soon due to have a crisis similar in commercial real estate similar to what recently hit the residential real estate market. The trouble has to do more with financing rather than cap rates, vacancy or any other issue. Their are some real issues with commercial financing.
- The length of the term. Most residential loans are for 30 years. Most commercial loans are short term 3, 5, or 7 years are common. If borrowers cannot refinance or pay off their loans, they either default or persuade lenders to extend their maturities. Right now 50-60% of properties failed to refinance within a few months of their maturity this year.
- When the loans were written and when they mature. A large number of loans with five-year terms taken out as property values soared and underwriting standards plummeted will come due during the next two years. More than $60 billion of the debt matures in 2011 and $80 billion in 2012, according to Bank of America.
- Late payments already occuring. Late payments on commercial real estate loans packaged into securities are at a record 7.5 percent, according to Moody’s, and may reach 11 percent by yearend.
I believe that commercial real estate will be a great investment soon. I don’t think we are there yet. I’m advising my clients to wait and accumulate capital to take advantage of the bottom.
