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Commercial Real Estate Values Drop 20% Since 4th Quarter 2007
By Doug Solether, 2009-04-15

 

Over leveraged? A drop in commercial real estate values - 20% since Q4 2007 - could hurt your chances of refinancing your commercial real estate loan.

 

Over leveraged commercial real estate properties may have difficulty refinancing thanks in part due to an unprecedented drop in values - 20% since the fourth quarter of 2007. According to CB Richard Ellis analysts, the decline in values is worse than those seen in the early 1990s.

 

And it could get worse. The breakdown looks like this; 11.5 percent in 2008 and 10 to 12 percent in Q1 2009, this according to Raymond Torto, global chief economist with CB Richard Ellis Research and Consulting.

 

Should Q2 drop in values maintain the trend seen in 2008 and Q1 2009, investors could be in even worse shape if their commercial real estate loan is due or called. Richard Parkus, head of CMBS Research at Deutsche Bank, projected in his firm's commercial real estate outlook last month that property prices are expected to decline 35% to 45% (or more) overall during this recession.


To put the decline in prices into perspective, the first year’s decline in the 1990s downturn was 4 percent.

 

However all is not lost. In the United Kingdom, the decline in values is about 39 percent, which is also a faster decline than what occurred in the 1990s downturn. But London has seen faster correction than other markets and is leading the way in comparison to the U.S. The correction in the U.K. during the course of this year is on the rental side more than the capital side.

 

If the US commercial real estate market trends similar, we could see values falling into the first quarter of 2010 and then begin a gradual stabilization, or even begin trending higher in Q3 2010. A recovering economy, job growth, inflation and absorption or retail space and office space could all be the catalysts for an improving commercial real estate marketplace.

 

So where does this leave an investor facing commercial real estate refinancing over the next couple of years. In a vulnerable position if your commercial property is over leveraged. While the CMBS markets were good to investors searching for high leverage, it could also be the Achilles heel by prohibiting the refinancing of commercial real estate that was over leveraged during the height of the CMBS boom.

 

Contact a Crefcoa commercial mortgage analyst to learn how we may be able to help you refinance your commercial real estate loan or multifamily loan.

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This article is protected under the copyright laws of the United States (title 17 U.S. Code). Any unauthorized use is strictly prohibited. If you would like to reprint this article for use on a commercial website, please contact Crefcoa for more information.
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