This modest increase in commercial real estate, says Lawrence Yun, chief economist of the National Association of Realtors (NAR) is based on gains in shipments of durable goods, a slight rise in industrial production, and somewhat more aggressive spending by consumers at the retail level.
However, despite this seemingly optimistic news, Forbes magazine suggests that commercial real estate is in a state of virtual collapse. Currently, estimates of commercial property defaults across the nation range as high as $140 billion. Construction loan delinquency rates are running at more than 15%. In addition, average prices of commercial real estate have fallen by more than 40% since their heyday in 2007.
On top of all these difficulties, $1.3 trillion worth of commercial real estate financing will come due and need to be refinanced between today and 2013.
Much of this money is held by life insurance companies, such as Met Life and Prudential Financial. NuWire Investor indicates that they, along with other insurance companies, may face losses that will point north of $22 billion during the next two years. This number is merely a fraction of the more than $450 billion in commercial loans that these companies now hold.
Deutsche Bank Securities estimates that banks may suffer losses between $200 and $300 billion as the commercial real estate market gradually melts down. The cause of borrower’s problems is evident all over the nation: massive layoffs have resulted in less rental of office space. Almost 2.5 million office workers have been laid off this year alone.
This has resulted in an average office vacancy rate across the nation of close to 20%, and average national rental rates have also tapered off by more than 15%. In some very surprising places, rents have come down by close to half.
For example, in pricey New York City, where rents ran as high as $120 per square foot in 2007, asking prices, including concessions and, to the dismay of landlords, build-outs, are going at $50 to $60 per foot for the same space.
Despite all of this surface gloom, real estate guru Sam Zell suggests, according to Crain’s Chicago Business, that while there will be “challenges” ahead, commercial real estate worries have been over-exaggerated. Zell further went on to say that while rental rates may drop by 30% or more, landlords will probably fill most of their vacant space within the next 2 years.
Zell’s calmer point of view may (or may not) be based on this very interesting statistic. The estimated total of commercial real estate debt in the United States hovers somewhere around $3.5 trillion, which certainly appears to be a massive debt load.
However, if all the commercial real estate in the nation is added together, it is worth somewhere around $6 trillion, give or take a couple of hundred billion. That means the loan to value (LTV) of all commercial real estate is under 60%. In the commercial real estate world, this remains a very comfortable margin for lending.
Written by Marc Jablon, Realty Associates
marcjablon@yahoo.com / (561) 213 – 6139
www.MarcJablonHomes.com
Posted November 23rd, 2009 by Armen Hareyan
