Comments on: Commercial Market Fears are Justified: The bearish argument

By: Lets Be Real

Lets Be Real — Fri, 29 Apr 2011 22:12:29 +0000

What will happen when business simply refuse to foot the high cost of doing business in this city? We keep comparing our city with London and with Tokyo and other major cities but that has to stop. As Americans we are a different breed of people. The general public is refusing to buy into paying more for less and after hearing that corporations are sitting on trillions the trickle down effect will be quite different. It will have a reverse reaction as the masses begin to refuse to buying into the premise that they must support the economy that is doing nothing for them and as big business does not do its fair share. All these issues will affect real estate and the international buyers are not as stupid as they were back in 2006 and 2007. That $1000 psf selling price for the seller is not longer attainable and rents have come down and will continue to come down as businesses take less and less space to cap their overhead expenses.

By: Scott

Scott — Sun, 27 Dec 2009 00:17:07 +0000

Always glad to give you some “in-cider” thoughts that are both juicy and thought provoking Honeycrisp.

As to your less construction-happy comment, the commercial construction market is still lagging, thus helping the supply when the second round of maturities blossoms in 5-6 seasons. I feel like the upturn will be much sooner than most think, not to mention we have orchardists like you managing both the new trees, and also the old growth, so we can’t go wrong!

By: Honeycrisp

Honeycrisp — Sat, 26 Dec 2009 21:32:59 +0000

We thought this piece might bring some juice out of you, Scott

To your points, indeed, the commercial market was much less construction-happy than was the residential one. And while we do believe there is a lot more pain to come, whatever upturn will come (albeit not for some time) is likely to be more steep in its improvement than the more plateaued projected scenario for the residential market.

By: Scott

Scott — Sat, 26 Dec 2009 20:24:41 +0000

Thank you Honeycrisp, this posting is like extending Xmas for another day! Your attempt to make us think that you agree with, or believe the naysayers who feel that commercial real estate will become an issue similar to the residential market properties are appreciated.

While there will be a large amount of commercial loans coming due in both 2010/2011 and 2015/2016, the doom and gloom is not anywhere near as bad as their residential siblings. The majority of the commercial properties that were used to secure loans with 5 and 10 year maturities in 1995/1996 were not underwritten and funded with the same overzealous loan to values as their residential siblings. You would never see a commercial loan underwritten at a 100% loan to value initially, it just doesn’t happen. While they might be at or above a 100% loan to value now based on current values, they are in no way in a similar situation as the residential siblings. The other thing that will help the maturities and property values in 2015/2016 is the fact there is not much new commercial construction happening, thus the demand for commercial property will fuel an increase in demand and prices of commercial properties.

As for default in 2010/2011 on commercial properties, I believe we will see lenders take partial write downs and refinance existing loans, or they will refinance their balances with the premise that values will rise again versus taking a loss. There is still a market for commercial loans, it is just tougher to find lenders that will make these loans.

I would like to raise my glass (an “apple” martini maybe) and toast the continuing bullish commercial market early, knowing I am looking forward to 2010 and beyond with great optimism!