Hard Times Ahead for Commercial RE?
Once again, the enemy is excessive debt and over optimistic lending. Many commercial real estate purchases are financed by interest only mortgages and most, if not all, commercial loans are short term in nature. Most require that they be renewed every 3-5 years at the then current terms and there in lies the rub. The bank regulators are requiring that commercial loan balances that have been financed using interest only loans be paid down a minimum of 10% in order to renew. This puts LOTS of commercial real estate owners in a very tight spot. With the national economy's softness, commercial vacancy rates are higher than usual and lease rates have been stagnant at best. If a commercial real estate owner who has been financed with an interest only loan cannot pay down his balance by at least 10% the loan won't be renewed. This makes for more foreclosures and short sales and we all know where that leads - Even lower values. If you are considering a commercial real estate investment make certain that your loan is NOT an interest only proposition. Those principle payments aren't fun but they are much more tolerable than a 10% mandatory pay down at the end of the commercial loan's short term.