The Great Recession has come and gone and while there are still echoes of its effects in the way we see and buy things, we survived. Some feel like the worst is already behind them, but others warn those who set aside their worries that new challenges are springing up in the commercial real estate industry.
New Challenges in the Commercial Real Estate Industry Post-Recession:
Rent Securitization – Commercial mortgage securitizations got a little out of hand in the mid-2000s. Underwriting standards had seemingly walked out the door and when the crisis hit, many owners were left holding keys to properties that were completely underwater. Many of those who ended up in this situation, simply walked away from the properties handing the keys back to the lenders as they left. Banks and other senior lenders like insurance companies are experienced in property management and foreclosure proceedings, but bond buyers are not which could create a problem. In the rental market, private equity firms have been buying up foreclosed homes, securitizing the debt and selling the securitized bonds to investors. This leads to a pretty substantial question, if things take a wrong turn who would handle the management of all these properties?
10-Year Loans Coming Due – There’s also a timing issue that needs to be addressed. Approximately $188 billion in commercial mortgage loans will reach their maturity between 2015-2017. Experts estimate that if interest rates rise at an expected rate, borrowers on most of the loans scheduled to mature in the next few years should be able to refinance. In some cases, these borrowers will be required to offer extra equity to cover any valuation gaps. This situation would apply in cases where there were underperforming assets or assets in tertiary markets.
Interest Rates Rising – In addition to improving fundamentals, part of what is driving the property investment sales recovery is the availability of affordable, and even cheap, debt. The Federal Reserve has held the interest rates at historic lows, but it can’t last forever. If interest rates begin to escalate it could put a damper on investor interest in commercial real estate; particularly if interest rates were to risk quickly and unexpectedly.
Today’s commercial real estate professionals may not be able to digest drastic interest rate spikes. It’s possible there could be a fallout from the new rental securitization deals. To learn more about the potential commercial real estate industry minefields, contact the experts at the Law Office of Retz & Aldover LLP.