Peter Pays Paul

Residential real estate had a tremendous run up in value and is severely overbuilt due to the easy access to consumer credit.

Commercial real estate, unlike previous downturns, did not commit the same error of overbuilding for the most part.

However, the macroeconomic factors of a stock market crash, tightened credit market, and a lack of consumer spending negatively impact commercial real estate.

According to CoStar Group’s article This Year, Pain To Replace Gain , 2009 will see a contraction in the demand for office and retail space.

CoStar’s CEO Andrew Florance presented a 2009 State of the Office Market review and reported that as many as 1,200 properties were either delinquent or past maturity. (Past maturity loans are not necessarily a bad thing. While the loans are in technical default, many lenders are happy to accept monthly payments while the borrower seeks to refinance the loan.)

Florance has one of the most poignant quotes from anyone in the midst of the wave of bailouts.

“The market needs to establish a new bottom before a recovery can take hold,” Florance cautioned. “The sooner we reach it, the better off we’ll be. If property values need to fall to X, it’s better to get there in 18 months not five years.”

This quote is filled with wisdom. Artificially inflating real estate values through bailout money or other funds will only prolong the downward movement. A hands off approach would allow the market to reach bottom sooner. We may feel the pinch now, but a prolonged painful slide would be avoided.

The Wall Street Journal reports in Dirt Lawyer is not impressed by this massive number (sic).

An unusually high number of the underlying CMBS loans that are going bad were made and securitized in the past three years. That is a sign that investors overpaid greatly for those properties and that underwriting standards were loose. In many cases banks lent money based on future income assumptions rather than current cash flows, experts say.

Only time will tell how good/bad 2009 will be. The sooner we reach the bottom the better for all involved in commercial real estate.

Photo credit: AdobeMac

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