Yun addressed a packed house of attendees all hoping to hear something positive in his forecast. Unfortunately, what they mostly got was some major concern surrounding the credit situation in the commercial market. Yun said the recent severe economic downturn and high unemployment continue to impact commercial real estate markets. "The commercial real estate market continues to struggle in this difficult economy, with rising vacancy rates and falling rents," Yun said. "Commercial transactions and sales are down across the country from the virtual lack of available credit—banks are not lending and mortgage-backed securities are virtually nonexistent. The government needs to take action to relieve some of the lending pressure."
According to Yun, the commercial real estate market price movement of the past 10 years closely mimicked the rise and subsequent fall of the residential housing market, even though commercial underwriting standards were far more prudent than those of residential subprime and other risky mortgage loans. Yun said in the current market the federal government is not backing commercial loans as it is for the residential home market.
While commercial REIT equity issuance increased recently because of positive increases in the US stock market, the flow of capital into the commercial real estate market remains weak because lenders remain very reluctant to lend, Yun explained. Yun pointed to data from Real Capital Analytics, which showed that the largest source of financing for commercial projects under $5 million is currently local and regional banks, which helped fund nearly 48% of recent transactions. Yun explained that there are many small regional banks that weren't involved in risky lending in recent years and aren't suffering from large amounts of loan defaults like some of the larger banks.
Like the residential housing market, commercial defaults have dramatically increased among all property types, especially the retail and multifamily sectors—and Yun predicts that defaults will continue to rise for the next six to 12 months.
Yun estimates that $800 to $850 billion in commercial loans will mature in the next two years and will require refinancing. "Policymakers need to step in and address some of the continuing lending problems in the commercial real estate market by developing policy or regulations to help facilitate the refinancing of these large, looming commercial loans," Yun said.
Yun ended his presentation with a prediction that the commercial real estate market could see more weakness before lending and transaction activity improves in mid- to late-2010. "Despite all of the challenges in the market, I expect to see some modest improvement in commercial lending to small business owners and commercial projects next year as banks become more stable," Yun said. "This could happen even sooner if the Federal Reserve stepped in with clearer rules and guidelines about refinancing commercial loans."
Following Yun's presentation, Stan Mullin from California Real Estate Receiverships provided the audience with some more doom with their gloom. "The issue of the current cycle is arguably a credit crisis. The 1980s/1990s was a real estate crisis. They are entirely different." As for who is lending, Mullin said that banks are not really lending because they are dealing with portfolio issues. He explained that life companies are being selective and want high quality assets and GSEs are going strong for apartments.
After Mullin's presentation, Robert Goldstein, founder, president, CEO and chairman of Hospitality Consultants Inc., attempted to look at the glass half full. "In hospitality, we talk about occupancy, not about vacancy," he said.
The next several years are going to present some unprecedented challenges for the CRE capital markets, Goldstein explained, but with it comes "huge opportunities for both commercial investors and practitioners." He continued that, "It won't be for the faint or weak of heart, but these next few years will create incredible wealth building and transfer opportunities for investors, and transactional fees for commercial practitioners who learn to deal in these complicated times."
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
