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Why are Commercial Real Estate Loans getting tougher to get from Banks?
Federal Regulators are tightening oversight on commercial real estate lending and warning banks that they are carrying a high concentration of such loans on their books which has resulted in tighter underwriting to the borrower. Regulators want to prevent any repeat of the 1980's, when the real estate market plummeted, taking many banks down with it.
The turmoil began in August 2007 when the stock and bond markets became alarmed at the rising rate of delinquencies among subprime residential borrowers amidst continued deterioration of the housing sector. Markets lost faith in subprime loans, securities backed by subprime loans, and businesses making, holding, securitizing and purchasing subprime loans. The turmoil in the credit markets is now disrupting many commercial real estate investment transactions by shutting off the spigot of easy money fueling the market in recent years.
What can we expect to happen next in the market?
Undoubtedly the Federal Reserve will be able to calm the financial markets and coax lenders and buyers back into the credit markets, whether for real estate, corporate bonds, prime residential mortgages or other types of securities and assets. But given the wake-up call of the past few weeks, lenders are likely to be more conservative going forward than they have been in the recent past.
It is prudent to expect capitalization rates to increase by a minimum of 25 to 50 basis points over the next few months, which, frankly, would be a pretty small increase compared with their decline of 200 to 300 bps over the past five years. And it is prudent to expect deal volume to pull back in the second half of this year and into 2008, particularly with the probability that mega-deals fueled by private equity such as EOP/Blackstone and the upcoming acquisition of Archstone-Smith by Lehman Brothers and Tishman Speyer will not be repeated.
Strong leasing markets will cushion this transition to a more sustainable, long-term footing for the Commerical Real Estate industry, assuming that the credit market turmoil does not sweep the economy into a recession - a reasonable assumption at this point-commercial real estate is likely to return to what it has been historically: a solid, income-based asset class with a relatively modest appreciation kicker. |
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How will commercial real estate be affected with the sub prime meltdown?
Impact to Commercial Real Estate
The turmoil in the credit markets is now disrupting many real estate investment transactions by shutting off the spigot of easy money fueling the market in recent years. Balance sheet loans from banks and insurance companies are still available, but at more conservative terms, while loans destined for securitization have slowed to a trickle. This has put investors who use little or no leverage, such as institutional and foreign buyers, in the driver's seat, while high-leverage private money has moved to the sidelines.
Prior to August, it appeared that the primary impact of the housing downturn on commercial real estate would be in buildings whose tenant rosters included mortgage lenders, title companies, builders and other housing-related businesses, many which were downsizing or closing. The retail sector also seemed at risk as strapped homeowners cut back on discretionary spending and sliding home construction reduced opportunities for shopping center developers. While these risks remain, the fallout for commercial real estate may have broader implications.
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Do only what matters
Robert Eliot, a cardiology professor at the University of Nebraska, has some great advise about keeping a big picture view when it comes to managing your time. "It's importnant to run not on the fast track, but on your track," he says.
Pretend you have only six months to live, and make three lists: things you have to do, want to do, and neither have to do nor want to do. Then for the rest of your life, forget everything on the third list.
Adapted from "From Ordinary to Extraordinary," John C. Maxwell, Leadership Wired.
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 Integrity is the Cornerstone of our business
Cornerstone Commercial Mortgage specializes in commercial real estate finance. We act as mortgage consultants, focusing on providing the appropriate financing solutions for each client. We work with investors and developers on all product types from land loans to permanent loans providing the best financing option available.
John P. Lloyd |
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