Commercial Real Estate Finance

Back in the late 1980’s and early 1990’s after the Savings & Loan crisis had seismically shifted the landscape of the commercial real estate market, many real estate players fell by the wayside. As you might remember, from this crisis came the economic adage, “Stay alive ‘til ’95.” Well, it looks like we have a new one — “Keep clean ‘til ‘13.” Despite some recent highly publicized signs of economic improvement, many feel that there is nothing but doom and gloom ahead for the commercial real estate market, and that burgeoning debt in the commercial real estate market will cripple the industry until at least 2013.

Phillip Blumberg of Blumberg Capital partners is one of those voices. He says he is certain the commercial real estate market will be “getting significantly worse.”

“Every job layoff pegs to our commercial real estate market. It’s a contraction in tenant space. The real story isn’t the performance in the market–it’s the debt. Think about this, in the next three years, 2010, which is when it really starts, to 2013, we’ve got about $300 million dollars worth of CMBS, of which $70 to $100 billion is not refinanceable.”

This sentiment is not uncommon due to the fact that unlike the residential housing market, the commercial market has always been a lagging economic indicator, meaning that it gets hit last, usually 12-18 months behind any macroeconomic turmoil. While everyone has seen definite stagnation in terms of transaction velocity and a major correction in pricing, unless there is a glaring need to sell, most owners have not realized these losses in value….yet. And even if property owners have somehow managed to steer clear of the CMBS mess, they may not be out of the woods entirely. Why?

As Philip Blumberg succinctly points out, “But to put it in real perspective, on top of CMBS, there’s $1 trillion of bank loans.”

So far, banks have been able to bury their heads in the sand when it comes to potentially troubled commercial real estate assets on their books. But even if these properties’ notes are performing, when the debt matures, the sheer magnitude of loans will pose a problem for banks. If the debt coverage ratios are the same, and the net operating income is the same, will the banks choose to roll the loans over and extend them? If so, to what loan-to-value percentages will they roll them over to, given the extreme pricing correction? What pricing benchmarks will they use with the drop-off in transaction velocity?

Of course, all of these issues and concerns lead to an even BIGGER question:

What’s keeping the commercial market from being bailed out next? When will TALF come to the rescue?

We welcome your thoughts and opinions!