The global balance sheet crisis will be driving economic decisions for the next ten years.  As the Boston Consulting Group recently wrote, “Either the politicians need to organize a systemic debt restructuring for the Western world… or we run the risk of the situation spinning out of control. In which case there will be no place to hide (italics added).“

As commercial real estate investors, we need to anticipate that sovereign debt issues in Europe, the United States, and Japan coupled with American consumer, student loan, bank, CMBS, and mortgage debt may result in a Lehmanesqe financial crisis.  While we hope the next two years will be uneventful, it is imperative to prepare for another liquidity crunch.   

In a liquidity crunch, cash is king, and so you should be certain that your investment strategies are sufficiently funded. Banks can stop making loans, cancel unused loan commitments, and ask for repayment of outstanding debt.

As you manage for the downside, consider refinancing now any bank debt maturing within several years, and evaluate establishing cash accounts at banks that are not providing you with loans. Avoid committing yourself to major purchases that depend on debt without protecting yourself with financing or material adverse change (MAC) contingencies. MAC clauses are uncommon in commercial property investing yet may be essential for today’s buyer.

Now is an outstanding time to buy real estate assets that have strong current income. Consider segmenting your valuation analysis such that you heavily discount any vacant space, and remembering that there is never any compromise on location.