Using the Web and social media to sell real estate

Where is the commercial real estate market going? And is it going anywhere in the first place? George Hurst, experienced commercial broker with Coldwell Banker Commercial, tells us that we are at a dead stop right now: increasing vacancy rates, falling rents, unemployment, the resulting decreasing cash flow will reduce the borrower’s capability to repay her loan, bringing forth a surge in foreclosures.

The commercial building market is coming to a stop.

Additionally, the now reduced values of the commercial properties bring about a very high loan to value ratio when the time comes for refinancing, making it impossible to renew the current loan, but requiring the owner (borrower) to come up with a substantial amount of cash just to keep the financing in place for a property that is already under water.

Today when you go to a bank to get a commercial loan you cannot use “performing income” any more as a basis for your financing. As the properties are less and less performing and therefore you need to reduce your evaluation. Sales of commercial properties have decreased of over 80% and the recent reduction in unemployment in some areas is mainly due to temporary jobs.

The health of commercial real estate depends mostly on the overall condition of the economy and it will likely stay weak for the foreseeable future. Some estimates say that by the end of 2012 we might see a slow change, but that is still a matter of opinion since many changes could come about in the economy by that time. The effects will be felt anyway up to the end of 2020, which is ten years from now. There are definitely factors that could help stimulate a faster recovery, but that is scenario that we are looking at right now.

The economic growth has returned slightly, there is a 3% increase in the first quarter of 2010 of the USA GDP (Gross Domestic Product – a measure of an economy that adds the total market value of all finals goods and services produced in a country in any given year at the current prices).

Yet that is tempered by unemployment which is increasing the vacancy rates constantly, and such increase has been slowed down so far by long term leases held by major corporations, granted back in 2005, 2006 or 2007 for class A properties (the highest quality) but when those will start to fall out, the rate of space available will increase dramatically, particularly in class A properties, and the lower classes (B and C) will fall right behind in succession.

The commercial loans that will go in default are estimated between 1.4 and 2 trillion dollars. There is an estimate of about 40% of current loans that are upside down, but Deutsche Bank has estimated that over 75% of the existing commercial loans will be difficult to roll over (renew). So the key opportunity is for investors to start a buying campaign on these properties that are ready to go in default, but the challenge is to establish a correct value for those properties, knowing that the market is still on a slide and that economic conditions are still unstable.

Roberto Mazzoni

Commercial Real Estate sales in Florida are down about 80% and in general the commercial investment market is off completely, this is the summary given to us by George Hurst a real estate broker with Coldwell Banker that is specialized in troubled assets during and that delivered the opening speech at seminar we organized recently.

Massive amount of commercial foreclosure coming up.

Transactions of commercial properties that are still occurring are mostly owner occupied or REO’s (bank owned), rents are falling and vacancy rates are increasing considerably; therefore we are going to be suffering from the explosion of bubble that took place in 2005, 2006 and 2007, primarily in 2006.

We are getting into a six year term of increasing foreclosures due to the peculiarities of commercial lending which is usually just for five years, and then you need to renegotiate based on the current performance. Therefore if we simply project from 2006 we see that in 2011 many properties will go in default because unemployment and the consequent decrease of rental income will not allow them to renegotiate their loan effectively.

There are two types of risk that get into play in a situation like the one we are going to experience: credit risk, which means that the reduction of cash flow makes it difficult to service the debt (make the loan payments) and credit contraction associated to an economic downturn which is what we are in right now.

Up to about four years ago, both bankers and developers where caught up in a dream a nobody believed there was going to be an end to the continued increase in prices, but it was just all artificial inflation and it reached an end due to a number of things:

Very lax underwriting standards by banks. In 2007 almost 60% of commercial loans granted were interest-only, so you paid only the interest without repaying the principal.

Faulty appraisals just like in residential.

Now these loans are coming for review in a few months and it is very likely that the bank will refinance only 60% of the new value which means much less than the currently outstanding balance. Do you think that the owners will bring cash to the table just to keep the loan going on a property that continues to devaluate: very unlikely.

So a major wave of foreclosures is likely to happen, but it will follow patterns that will be quite different from the residential world and will find out more about that in the next articles inspired by this special seminar.

Roberto Mazzoni