Capitalist Preservation: Op/Ed: The Commercial Real Estate Market

This op/ed is being written based upon my observations here in Southern California. I have often wondered about all the industrial parks I have seen pop up with little to no activity in those facilities.? This is my view of what we can expect to see in 2012 and beyond.?

The other shoe is about to fall in the world of real estate and it's not residential real estate.? It's?commercial real estate, which up to now hasn't really been in the news.? Commercial real estate loans, unlike home mortgages, have much shorter terms for repayment.? The typical home mortgage is for 20 to 30 years.? Most commercial real estate loans are for five years with monthly interest payments and a huge principal balloon payment at the end of the fifth year.? Here's where the problem begins.

Think back to the boom in 2007.? That's when commercial real estate was booming too.? All kinds of commercial real estate was popping up all over.? Think strip malls and industrial parks. That means a lot of commercial mortgages were being written to pay for these properties.? Fast forward five years when these mortgages come due.? Oh, wait, that would be this year, 2012.? Commercial real estate, like residential real estate is significantly depressed.? What happens when these mortgages and their huge balloon payments come due?? Well, borrowers could buy down those large balloon payments and attempt to refinance those loans, if they have the money to buy down the original loan principle remaining.? Chances are that businesses don't have that kind of cash, what with business being depressed.? So, what to do?

Commercial borrowers could attempt to refinance those original loans at the prevailing lower interest rates.? But, there is a catch.? The value of those commercial properties has plummeted precipitously like residential real estate.? Lenders aren't about to refinance those original commercial loans when the value of those properties has dropped well below the outstanding mortgage amount.? As an example, say a borrower bought a property at $100K and put down $20K with a loan of $80K.? The property now has a present value in the depressed commercial market of $60K.? How does a borrower refinance an $80K loan when the collateral is now worth $60K?? The answer is that no lender in their right mind would write such a loan.

That leads to the most likely final conclusion.? Bankruptcy.? The residential real estate market has yet to clear itself of a substantial percentage of underwater mortgages and it's had five years to do so.? Now along comes commercial real estate and the beginning of their trials to salvage their market.? Be prepared to see more vacant commercial properties popping up in a neighborhood near you this year, with more to follow in the years to come.

The commercial real estate bubble is about to break open big time.? The only thing that could save it would be for the overall economy to turn around on a dime and that prospect is about as dim as someone buying a lottery ticket and winning the big bonanza.

Source: http://capitalistpreservation.blogspot.com/2012/02/oped-commercial-real-estate-market.html

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