Why has commercial real estate taken such a hard hit? We would like to go into some of the reasons and repercussions the recession has had on real estate. Real estate investment strategies have changed and, if you want to still be in the game, you need to learn the new rules of play. The latter part of 2007 and the first half of 2008 began what we call our “The Great Recession.” Why has commercial real estate taken such a hard hit? When the Great Recession hit the $6-trillion U.S. commercial real estate market hit a decline—that ultimately increased the risk for investors.
Gross Domestic Product
It is crazy that some argue that the economy still is not in a recession, because consumers, businesses, and government budgets are all feeling the pressure of a contraction. A contraction occurs when there is a decline in the GDP in a country—GDP means “Gross Domestic Product.” The GDP is the total market value of national goods and services during a given time. Just like peak oil and global warming, economic contraction is a “game changer.” As the economy we now know crumbles, the far-reaching repercussions sculpt every aspect of our future, and that means in real estate the game is changing.
Consumers Tighten Their Purse Strings
Why has commercial real estate taken such a hard hit? The commercial real estate market, which encompasses apartment complexes, office buildings, industrial parks, hotels, malls, and many other properties used for business purposes, is an industry that runs in cycles and the name of the game is closely tied to the rise and fall of the economy. In times past, property owners benefited from a huge demand for office space and a steady stream of rental income. Why has commercial real estate taken such a hard hit? We see abandoned malls, grocery stores and business parks every day. When economic conditions decline, businesses scale back on commercial property. What this means is skyrocketing vacancy rates and decreasing rents for property owners. It also means that without getting rents, property owners are defaulting on their loans. Commercial real estate has been hit so hard that those still holding retail space also suffer as consumers tighten their purse strings.
Refinancing Faces More Scrutiny
We want to make you aware of some ways loans are being affected in these economic times. Market values in commercial real estate are facing a decline as capitalization rates rise to reflect higher risk premiums. There is also something else going on. Investors facing loans dependent on refinancing will face more scrutiny from lenders. Many investors will be forced to accept more recourse loans. A recourse loan is a loan that allows the lender to get financial damages if the investor fails to pay the liability. Additionally, the lender will be paid damages if the value of the underlying asset is not sufficient. In essence, a recourse loan allows the lender to go after the investor’s random assets that were not included in the loan collateral if the investor defaults.
Commercial Real Estate is Being Recycled
Yes, the heyday of the residential and commercial market is behind us with more challenges on the horizon. The good news is that the commercial real estate market in many areas is at the bottom of the inflection point. Residential real estate is worse off in most areas as well. What is happening is that the commercial market has been able to avoid a major collapse because of the absence of industry-wide overbuilding, voluntary curtailment of new construction, and the continued development of new commercial businesses. What this means is that commercial real estate is being “recycled.” Consumers are leasing abandoned buildings for new businesses. Building has slowed down but it is still going on with business parks, mini malls, and “brand” development such as Starbucks coffee shops. Basically, we want you to know that commercial real estate has not remained unscathed in these economic times, but it still has the potential to be a lucrative way to make money.
We Want You to Be Aware
Why has commercial real estate taken such a hard hit? Now you have a general understanding of how commercial real estate has been affected by the recession and how it is being transformed in these times. We want you to be aware of what is going on in order for you to make the best business decisions possible in commercial real estate investing.