Distressed Commercial Real Estate Abounds
The media has focused on the housing sector of the troubled real estate market because it is up close and personal. While the decline of the commercial real estate market is not as personal as the decline in housing, it is just as devastating and likely to be around for a long time.
When you visit an office complex, or drive by a local strip mall or shop at a retail mall, you cannot help but wonder where all the tenants have gone. These malls and empty offices are by-products of the tragic employment situation.
The commercial real estate market is dismal and not getting any better. Investors had hoped for assistance in the financial reform package but instead feel betrayed. For the commercial sector to gain any momentum, the residential crisis needs to improve. The new reform package is well intended but very short sighted as the new credit scrutiny will make it even less appealing for lenders to open the credit doors and more difficult for borrowers to qualify.
Commercial property is driven by occupancy rates. As big corporations and retailers have cut back, vacant space has erupted everywhere. According to the National Association of Realtors (NAR):
· Property development has a 38% vacancy rate.
· Hotels are running at a 26% vacancy rate.
· 21% of office space is vacant.
· 21% of retail space is vacant.
· Industrial vacancy is 19%
· Multi-family properties have a 12% vacancy rate.
The NAR projects that peak vacancy rates will occur in the spring of 2011. Moody’s reported that commercial real estate values rose 3.6 percent in May but the market is down 38 percent since its peak in 2007.
Defaults on commercial apartment loans are at 4.6% despite the fact that tenants are plentiful because of the number of residential foreclosures. Real Capital Analytics reports that commercial defaults will continue to rise until employment gains momentum.
Investors in commercial short sales are on the rise. Commercial short sale buyers must be prepared to carry vacant space for a minimum of two to three years. Buyers need to understand the cost of all necessary repairs and fully understand the existing lease arrangements with tenants. Usually the buyer can obtain permission to speak with the tenants prior to making an offer. Investors who find tenants first are ahead of the game
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