Thursday, November 5, 2009

Commercial Real Estate Retreating from the Brink: Banks "Extend and Pretend" -- Values to Hit Bottom in 2010

commercial property activity 2006 - 2009On a scale of 1 to 10, with 10 being a rosy, optimistic environment, and a 1 being a market down in the dumps, how is the US commercial property market faring? We'd say it would earn about a 2. Yes, the fear of utter market collapse has retreated, but with record job losses and businesses in triage mode, returns for commercial properties have hit the skids.

Complicating matters, few buildings have changed hands. Sellers are stuck with huge loans and are fixed on unrealistic, outsized asking prices. Buyers find it all but impossible to obtain loans. The market has been in a deep freeze for well over a year, with sales volume off 80 - 90% from 2007.

The retail and office sectors are anticipated to suffer the greatest declines in value and to take the longest to recover. Multifamily is expected to be the first sector to bounce back, as the fundamentals in Southern California -- young population, high birthrate and immigration -- are strong. The hotel sector could also recover quickly as the economy improves.

Just like in the residential market, the banks will play a key role in the recovery. Currently, instead of foreclosing on delinquent property owners, banks choose to "extend and pretend" -- to rework terms rather than call loans and demand balloon payments from distressed owners.

Is there a light at the end of the tunnel? Yes. Commercial property values are expected to bottom out in 2010. And equity investors are now sitting on the sidelines earmarking cash for purchases. Expect exciting times ahead when deep-pocketed investors go building shopping at bargain-basement prices. [Los Angeles Times]