Editor’s Note: This reinforces what has been said on CFB for months now. Commercial real estate is the next boot to drop in the general real estate decline. This is going to pile up more losses for banks that are holding this type of paper on their books. We are predicting here that a bailout will be announced for the commercial property market to help refinance all these “under-water” commercial mortgages. Or, if we do not see this happen then we will see a flood of defaults or borrowers walking away and that will lead to a growing “Commercial REO” market that will drag down prices on commercial properties in the same area. It can become a vicious cycle.
Idaho Business Review: There’s trouble brewing in commercial real estate. Say you bought a building for $1 million in 2005. At the time, you could get a loan for 75 percent of the value, so you paid $250,000 down and you owe $750,000.
Now it’s 2010, and your loan is due. It’s time to refinance.
You face two problems: First, the value of your building has declined due in part to fewer tenants, lower rents and fewer buyers. Say its declined 20 percent, so it’s now worth $800,000.
And second, banks are more cautious now, and they’re only willing to loan 65 percent of the building’s value.
You’ve paid off some of the building, but not much – say you still owe $700,000. The bank can only finance $520,000. You’re going to have to come up with $180,000 cash if you want to keep your building afloat.
That’s the problem thousands of commercial property owners are facing around the nation. Some experts predict commercial real estate values will fall 50 percent from their peak before they start to turn around.
And with $1.4 trillion of commercial loans coming due in the next five years, a surge of defaults could be on the horizon.
New York-based analyst Real Estate Econometrics recently predicted the national default rate would reach 5.3 percent by the end of 2011, up from 1.62 percent at the end of 2008.
Some think Idaho is well positioned to avoid the worst of the impending crash.
You must log in to post a comment.