Have We Hit Bottom Yet?

By Erik Anderson
Commercial Partners Realty, Inc.

For months now, we've all been hearing the gloom and doom news that there's another round of foreclosures in the commercial real estate industry. We have certainly seen some reduction in sale prices, but it's nowhere near what you might imagine if you only paid attention to the mainstream news. The truth is, businesses are still operating. Buildings are still being purchased and leased.

Sale prices have been "corrected" from the overinflated value of 4 and 5 years ago, but the sky is not about to collapse. Banks are not foreclosing on properties at a wholesale rate. Although there are troubled assets, banks are learning to deal with them, rather than foreclosing and dumping them on the market at the rate the media would have you believe.

The truth is, nobody wants to foreclose on a property. Not only does the investor lose their investment, they lose the ability to borrow money for similar investments in the near future. The bank also loses in a foreclosure, since it must realize a loss on the defaulting loan. And the market suffers as another building is added to an already bloated inventory as a "short sale." With foreclosure, everyone loses, so everyone is working very hard to avoid it whenever possible.

Because of this, banks have learned to work with their clients and keep the loan working if at all possible. They can switch to interest only payments. They can extend the term. They can fix the rate of an adjustable rate loan. All are ways to reduce the monthly cost of the loan. By doing so, they help the investor maintain possession of the asset.

When the owner maintains possession of the asset, they can continue to pay the loan, saving the bank from realizing (and reporting) a significant loss. This gives the owner an incentive to maintain the project, rather than let it fall into disrepair, which would cause it to lose further value. And often an owner is better able and more willing to maintain the property than a lender already overburdened with assets would be.

I've been involved in a number of projects where the banks have stepped up and modified their loans so that an owner can maintain possession. These are often projects that have seen tenants move out, thereby reducing the cash flow and making it impossible for the owner to continue to service the loan. Rather than stand on the terms of the original loan, they have chosen to sit down with the owner and find ways to modify the loan to allow the owner to maintain possession.

Banks will continue this trend of working with owners, rather than foreclosing on them. The result will be a reduction of foreclosures coming onto the market than previously predicted. This coupled with the recent gains made in the overall economy will lead to a "bottoming out" of commercial real estate prices and hopefully a recovery in the very near future.

Having said all that, what does this mean for you? It means that we are at or close to the bottom of the market. Sale prices and lease rates are lower than they've been in years, and with the economy in recovery, now is the time to take advantage of the market. If your business is stable right now, chances are that it's only going to get better. There are some great opportunities in the market today, and prices are not likely to continue to fall much more, so take advantage. Anyone who is buying or leasing commercial real estate right now, is going to be very happy as they watch the market and the economy rebound over the next few years.