Commercial Real Estate Healing Very Slowly

Armen Hareyan's picture

Even though the housing crisis has and will continue to consume the thoughts of most Amercians for the near future, there is an additional real estate problem that the nation is weathering. This is the precipitous drop in commercial property values that began in the middle of 2007.

The prestigious MIT Real Estate Center said that commercial property prices had dropped almost 42% since their 2 years ago. However, prices for commercial property that was sold by institutional investors moved up by a startling 4 percentage points this quarter.

While 4% may not seem like a startling increase, it was the first real sign of a heartbeat that the commercial market has shown in almost 8 quarters. The head of the MIT Center proposed that this uptick may indicate that the commercial market has finally hit bottom.

What’s more, along with the price improvement came a survey indicating that investors would be willing to pay an additional 12% for properties. After 8 quarters in which buyers were only willing to pay substantially less than asking price, this positive attitude appears likely to help to boost the commercial market. Perhaps more important, commercial transactions increased from 42 to 90 last month for a second straight time in the third quarter.

Yet, despite all of the positive signs, the U.S. commercial mortgage delinquency rate was close to 5% percent in October. This was a rise from the previous month’s total of 4.36%, and it made the last year’s delinquency rate of 0.77 rate seem almost miniscule.

These missed mortgage payments and delinquencies do not bode well for the commercial market. When these properties were bought, the same irrational exuberance that ruled the housing market permeated commercial real estate. Many buyers paid top of the market prices, and put down very little cash, because mortgage terms were far more lenient than they are today. Because of the lack of cash commitment, many owners have little incentive to hang on to non-performing properties.

Of course, the non-performance is due to the fact that many renters, as a result of the current climate of slower business, are not generating sufficient cash to cover their monthly payments. As a result, landlords are not able to collect sufficient rent to pay their mortgages.

Because of the widespread economic woes that have affected virtually every enterprise, experts predict that up to 10% of shopping malls and close to 200,000 businesses may go under during the next year.

There is, however, some good news that can be extrapolated from all the commercial gloom and doom. For those businesses that manage to survive the recession, there will be ample opportunity to press landlords for lower rents and larger spaces.

Written by Marc Jablon, Realty Associates / 561 / 213 – 6139
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