Foreclosures on Commercial Property
Becomes the Hottest Next Real Estate Opportunity?
by Scott Meyers, CSSM (February 2014 Newsletter)
The Washington Post recently reported that there’s mounting evidence showing that the looming foreclosure wave will dramatically affect the commercial real estate market.
The Web site of the Congressional Oversight Panel, a group that Congress created to oversee the financial markets in the U.S., recently published this message message:
“Commercial real estate loans made over the last decade — including retail properties, office space, industrial facilities, hotels and apartments — totaling $1.4 trillion will require refinancing in 2011 through 2014. Nearly half are at present ‘underwater,’ meaning the borrower owes more on the loan than the underlying property is worth. While these problems have no single cause, the loans most likely to fail are those made at the height of the real estate bubble.
“The Panel found that ‘a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American.’ When commercial properties fail, it creates a downward spiral of economic contraction: job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities. Because community banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession.”
“The new round of financial pain, which some had anticipated but hoped to avoid, now seems all but certain. ‘There’s been an enormous bubble in commercial real estate, and it has to come down,’ said Elizabeth Warren, chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout. ‘There will be significant bankruptcies among developers and significant failures among some community banks.’
“Unlike the largest banks, such as Citigroup and Wachovia, that got into so much trouble early on, the community banks in general fared better in the residential mortgage crisis. But their turn is coming: Not only did community banks issue a higher proportion of commercial loans, but they also have held on to them rather than sell them to other investors.
“Nearly 3,000 community banks — 40 percent of the banking system — have a high proportion of commercial real estate loans relative to their capital, said Warren, whose committee issued a report on commercial real estate last week. ‘Every dollar they lose in commercial real estate is a dollar they can’t use for small businesses,’ she said. Individuals — who saw their home values drop in the residential mortgage crisis — would not feel that kind of loss, but, Warren said, a large-scale failure would ‘throw sand into the gears of economic recovery.’ ”
So what does this mean for the Commercial Real estate Investor! Well, you guessed it: Opportunity. Although the landscape looks grim on the surface, the silver lining is that there will be a bevy of bargain basement priced commercial properties being sold by these banks. And although the community banks will experience a fair amount of this pain, I have to disagree with the magnitude that the post has declared. The community bankers I talk to are in pretty good shape. Some will be offering some properties for sale on a short sale basis, others may be taken back by the bank as they are unable to refinance with the new value placed on the property.
The savvy, educated investors are lining up funding – with both bank funding and private funds to take advantage of the greatest “land grab” opportunity in commercial real estate this country has seen since the Great Depression. This author/investor included!
Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage™ and is considered America’s leading authority on Self Storage Investing through his company SelfStorageInvesting.com. To reach him, or to invite him to speak, call 866-693-5999; e-mail Scott@SelfStorageInvesting.com; or find him online by visiting www.SelfStorageInvesting.com.