Commercial real estate: the history repeats itself
In the 1980′s there was a real estate boom, commercial loans had gone from 7% to 12% of banks total assets in the US. The market went up and then it came down again following its typical cycle and the government had to bail things out. They had to spend over 157 billion dollars to protect borrowers and bank’s assets at that time.
Over two thousand banks and savings and loan associations disappeared between 1986 and 1994. More precisely, 1,043 savings and loan associations and 1,248 banks failed with assets of 726 billion dollars which equates to 1,19 trillion dollars in today’s houses. At that particular time, Congress came up with the idea of creating the Resolution Trust Corporation, a united States Government-owned asset management company charged with liquidating mostly real-estate assets that belonged to savings and loan associations declared insolvent by the Office of Thrift Supervision.
The following video is taken from an event I have just helped organize and the first speaker of the event, George Hurst, of Coldwell Banker Commercial, mentions a particular property out of his memory that was about a 200,000 sq ft regional mall that had been built in 1987 in Hudson Florida, very close to US 19 highway.
It was the size of a Super-Walmart and had been never occupied, sitting on 30 acres of commercial property. RTC disposed of it and sold it to GE Capital Corporation for 650,000 dollars, and there was an investor at that time in Saint Petersburg Florida that was willing to pay 2,6 million dollar for it and that was already a steeply discounted price.
From 1990 onward, commercial real estate became again the popular vehicle of investment for several reasons:
- the economy was growing and therefore there was an upswing demand for office and retail space
- regulatory problems in the government had been resolved
- the restructuring of investment in REIT‘s (Real Estate Investment Trust – a corporation investing in real estate in a way that reduces or eliminates income taxes) increased from 10 billion dollars to 176 billion
- Wall Street investors and banks found it easy to get into these investment projects with low capital
- the tax reform of 1986 had dropped taxes from 50% to 28% and brought in low income tax credits, a lot of tax deductions for rental properties
- the technology bubble exploded in 2001 drove investors back to commercial real estate.
During the real estate boom of mid 2000′s we see the same things happening again: interest-only loans, very lax underwriting standards (it was very easy to get a loan), banks being caught up in the dream that the market prices would rise forever. In 2003 large banks had commercial real estate portfolios equal to 156% of their risk based capital (the amount of capital based on an assessment of risks that a bank should hold to protect customers against adverse developments).
By 2006 that figure was 318%, it had more than doubled in three years in commercial real estate alone. In 2007 we had the crisis of the sub-prime residential mortgages, the bubble began to burst and although the FDIC (Federal Depository Insurance Corporation – it guarantees the safety of deposits in member banks) had already identified commercial real estate as a problem, the main focus was on residential.
Congress created in 2008 the Emergency Economic Stabilization Act and the Trouble Asset Relief Program known as TARP.
Now it is time to tackle the commercial real estate crisis and in the next post we will take a deeper look at it.
Roberto Mazzoni










