The Commercial Real Estate Tsunami

A tsunami is imminent for the commercial real estate (CRE) market, one not comprised of water but of debt, according to Tony Wood, commercial real estate expert and author of the new book The Commercial Real Estate Tsunami.

The Commercial Real Estate Crisis

• An unprecedented wave of commercial debt loans—about $1.4 trillion—will reach the end of their terms between 2010 through 2014.

• Nearly half are at present “under water,” that is, the borrower owes more than the underlying property is currently worth.

• About two-thirds of the estimated $700 billion in securitized (CMBS) loans will not qualify for refinancing.

• Commercial property values have fallen more than 40 percent since the beginning of 2007. Banks are not adequately protecting themselves against potential losses, setting aside only 38 cents of every dollar for bad loans. As a result of the commercial real estate defaults that lie ahead, more than 700 banks could possibly fail. 3,000 community banks are already at risk of insolvency due to their CRE debt exposure

• CRE Vacancy Rates are at historically high levels, ranging from 8 percent for multifamily housing to 20 percent for office buildings, and rents have declined 40 percent since the beginning of 2007.

How to Mitigate the Impact

For owners, Tony suggests requesting workouts from their lenders. Lenders are becoming more willing to listen to these requests and are encouraged by the Fed to work with borrowers on their distressed situations. Owners also need to be more vigilant and attentive landlords in order to increase tenant retention.

For potential buyers, due diligence is of the upmost importance. In purchasing distressed or REO property, the fundamental discount must correlate to the resolution of the issues the property presents in order to mitigate risk.

For CRE brokers, the questions become how do you sell when there are no sales occurring and who do you represent when there is no one in the market? During this drag period, brokers should focus on recessionary products that match the desire to cut costs, restructure, and navigate uncertainty. According to Tony, winners in this climate will focus on cost saving services such as tax appeal, tax segregation, and expense management service; lease restructuring that blends and extends the current lease rate; lease termination or surrender; and debt or equity restructure or surrender.

Buying opportunities will come as this part of the cycle levels out from the wave of foreclosed CRE properties flooding the market, the question is when will this market cycle begin to stabilize? Many lenders have delayed the inevitable with extend and pretend methodologies as the wave of debt maturities and increasing defaults continue to rise. The current cycle will begin to see a “bottoming out” once there is significant job creation and increases in demand for commercial real estate use. Until then efforts must be made to refinance or otherwise “workout” the CRE debt that qualifies while lenders are encouraged to expedite the foreclose of CRE debt that requires deposition.

Congressional concern and proposals for new legislation is ongoing but more needs to be done—The Real Estate Roundtable has some great approaches which include tax reforms to benefit owners and others that would entice foreign investors back into the US CRE markets, Tony also supports a reduction or temporary elimination of the Capital Gains Tax on CRE investment to stimulate the market back into existence.

The Commercial Real Estate Tsunami: A Survival Guide for Lenders, Owners, Buyers, and Brokers (Wiley Finance) $49.95 An in-depth look at why a commercial real estate collapse is inevitable, and how to survive itThe Commercial Real Estate Tsunami is the first book to address the phenomenon of the pending wave of commercial debt maturities coming due in the next five years, and the impact those maturities will have on the commercial real estate markets when combined with the historic economic crisis the world is e...

Real Estate Tsunami Survivor's Guide: Prospering in Today's Financial Storm $24.99 Real Estate Tsunami Survivor's Guide is the definitive analysis on the causes of the commercial real estate bubble of 2005-2007 and the subsequent Great Debt Implosion. Written in plain language by Peter Ingersoll, who has over twenty-five years of professional experience in commercial real estate, it outlines how to safely approach investing in commercial real estate in the current distressed mar...