Commercial Real Estate Forecast: Cloudy, Chance of Light at the End of the Tunnel- Early 2010

A perspective from Daniel Lisser, Managing Director of Johnson Capital
(re-printed with permission from Mr. Lisser)

Completing transactions in the commercial real estate market remains difficult due to a lack of securitized and unsecuritized lending activity. Commercial mortgage-backed securities (CMBS) lenders were once the most active capital source, but they left the market a year ago and their return is still a ways off. While a full recovery of the commercial real estate market may not be imminent, transactions are still getting done on a conservative basis, and the federal government’s stimulus plans provide hope for the near future.

Initial signs of distress in the commercial market could be seen in the beginning of 2008, with massive deleveraging and a sharp increase in defaults, and it has only worsened throughout 2009. Not only are we continuing to see rising defaults across all property types and in all markets, property values have dropped over 35% according to a number of different market reports. In an attempt to buoy the recession’s effect on the commercial market, the federal government implemented various programs including PPIP, TALF and TARP to spur lending, but these programs have not been especially effective in stemming the decrease in values or encouraging lenders to come back into the market.

Refinancing risk has become a key issue in recent months - many maturing loans cannot be paid off in full due to sagging property values and increasingly conservative underwriting standards. This is especially problematic for loans that were originated at the height of the market from 2005-2008, which will be maturing over the next few years. According to the Federal Reserve, a massive $271 billion of commercial real estate loans are expected to mature by the end of 2009.

The question on many people’s minds is, who will be the new lender for these maturing loans? The demise of the CMBS market, a $200 billion-a-year market at its peak, left a tremendous void that has not yet been filled by other lenders. Even if portfolio lenders such as banks and insurance companies were to extend all of their 2009 maturities (which is extremely unlikely), we would still need to find additional sources to fill the gap left by the lack of CMBS financing.

Banks and thrifts stand out as the most likely equity source, as they are currently the largest lenders in the commercial real estate market. Today, they have an almost 50% share of the $3.4 trillion commercial mortgage market. However, it is highly unlikely that banks would be able to grow their commercial mortgage portfolios in the face of rising delinquencies in their existing portfolio. Also, banks are failing at an increasing rate and are continuing to be overtaken by regulators, which has increased the strain on the entire banking system.

With a lack of capital in the market, banks are trying their hardest to avoid defaults - extending loans with borrowers who are able to cover their debt service out of property cash flow (pretend and extend) and trying to work out loans with borrowers who are unable to cover debt service.
The commercial mortgage market will not stabilize until the general economy recovers. In order for that to happen, the unemployment rate must stabilize, consumer confidence and retail sales need to rebound and the housing market must find stable footing. Until then, tight underwriting standards, rising cap rates and a weak economy will continue to impact existing credit and the extension of new credit in the commercial market. However, the federal government’s programs including PPIP, TARP and TALF along with the stimulus package will all be extremely beneficial for the commercial real estate market and are reasons to be optimistic that there is light at the end of the tunnel starting in early 2010.

Founded in 1987, Johnson Capital is one of the country’s top real estate capital advisory firms with eighteen locations nationwide. Their services include debt placement and acquisition financing for permanent, construction and repositioning in addition to joint venture equity placement for individual assets, portfolios, entities and discretionary funds. Johnson Capital transactions have ranged in total funding from $1 million to over $300 million and have financed all property types, including: multifamily, office, retail, industrial, hotels, mixed use, manufactured housing, credit-tenant leases, single-family housing and land developments. For more information about Johnson Capital, log on to their website at:


Costa Rica Real Estate said...

it is starting now stephen, I can see that more people is buying homes because prices are lower and they are seeing a recovery in the economy

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Lots for sale in Costa Rica said...

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