Whew!! 2007 – “That Was The Year That Was”. That statement, the modified title of a 1970’s TV series, poignantly describes our past year in the world of Commercial Real Estate. We saw a lot: frenzied buying, unbelievably low cap rates, non-recourse money, a lot of mezz debt and equity, 100% financing and THEN almost overnight, the spigots were turned off!!
Suddenly, lenders are looking for more equity participation, higher debt coverage ratios, and that dreaded scenario, higher interest rates.
If you were an active buyer and aggressively leveraged your properties then you are probably scratching your head trying to understand what just happened.
If, on the other hand, you weren’t the “high bidder” on your acquisition targets, then you may be in a very interesting situation. How’s that, you ask? Well, let’s take a look at what transpired.
Simply put, credit, for the past couple of years was too easy, underwriting too lax, and it all came to screeching halt in 2007. You can look at the stories surrounding the Commercial Debt Obligations (CDO’s) and Commercial Backed Obligations (CBO’s), and surmise that it was essentially a problem of packaging and valuing debt instruments between lenders. The real story is much simpler, credit just got too easy!! Is this a first? Hardly, and, if history is any indicator, it won’t be the last. In the 80’s, the savings and loans decided they could “play” in the commercial real estate world. The result? The Resolution Trust Corporation (RTC), an agency formed by Congress in 1989 to respond to the insolvencies of about 750 savings and loans. The insolvencies were created by lax underwriting, too much money chasing too few deals, and easy credit. Sound familiar? What was the result of the RTC? Savvy investors who did not get caught in the leverage frenzy were able to buy real estate at below market and significantly below replacement prices. Investment in commercial real estate created wealth during a period that many would describe as a very tough market.
Will 2008 be your opportunity to create wealth in commercial real estate? Could be. The foreclosure notices are growing exponentially, underwriting has “tightened up”, and deals are getting re-traded.
New Year’s Resolution: Stay in touch with your commercial broker to take advantage of “wealth creation” opportunities! Don’t have a commercial broker? Call 478-746-9421!!
Rick DeLisle
Senior VP Commercial Divsion
Macon Commercial Office
478-746-9421