Since October 2007 there has been a 43% decline in value of commercial real estate and an additional drop between 17 and 20% is anticipated this year, and probably is not going to stop any time soon, actually the credit crunch will continue probably until 2014.
Learn the secrets of commercial loan modification.
Vacancies have increased 40 basis points (0.4%) in May 2010 which is the greatest increase in history and the overall decrease for the first half of 2010 is 200 points (namely 2%). There are 3.5 trillion dollars worth of loans that are outstanding and that are about to come due in the next 12 to 14 months due to the illiquidity in the credit market. Before granting any loan or renewing a loan, banks are watching very closely two parameters that are important in commercial real-estate: debt-to-income ratio (the amount of money coming in as compared to the debt payments to be made) and debt-service coverage ratio (the amount of cash flow available to meet interest and principal payments).
So even if it is a performing asset, the banks decide not to move forward with the financing and leave the commercial property in what is called “strategic default” or “technical default”.
The “Congressional Oversight Panel” estimates 1.4 trillions in commercial loans that are going to reach their terms in the very near future. The largest losses are scheduled to begin in 2011 and it’s going to be in the range of 200 to 300 billion dollars.
The Board of Governors of the Federal Reserve issued a policy statement advising financial institutions to extend and restructure loans whenever possible, but who gets to decide whether a loan is going to be extended or not. Find out in this thorough video explanation.
Roberto Mazzoni
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