Commercial Real Estate - What Is The Present Status_ (1)


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Commercial Real Estate - What Is The Present Status_ (1)

  1. 1. Commercial Real Estate - What Is The Present Status?U.S. Real estate markets are not so-healthy as they were for decades. First the residential propertysector was plagued by the foreclosure crisis and is yet to recover from the devastation. Arising out ofthe foreclosure crisis, there were many cyclic reactions in the financial market. The cash-crunchspread fast to other areas of financial activities - like auto loans; credit card purchases; hotel roomoccupancy; business revenues in shopping malls; renting office complexes and so on. Commercialnew construction projects were either put off or abandoned totally, aggravating unemploymentproblem etc.The commercial real estate market is inevitably inter-related with all the above businesses. As suchthe depletion in business revenues is reflected in foreclosure of commercial properties also. How?For example, if a big hotel losses heavily on revenue by the non-occupancy of its rooms, ultimatelyfinancial commitments, including the mortgage repayments get hard-hit. The situation of default inmortgage repayment, consecutively for months, eventually leads to foreclosure and distress sale ofthe commercial property concerned. Needless to mention a distress sale will bring the market value ofthe property deep down.Which branch of commercial properties is most affected? We have come across news reports aboutthe commercial foreclosures - particularly in the hotel sector - the affected hotels of luxury located inthe tourist industry hot-spots of Las Vegas in Nevada, Florida, and California etc.What is strikingly different in residential foreclosures and commercial foreclosures is - when aresidential property is foreclosed, the amount in loss of money is about few thousands of dollars,whereas in a commercial foreclosure, the amount involved runs into millions of dollars.It is for this reason, the lending institutions extending financial supports for commercial propertyprojects are dragging their feet in coming forward to extend new loans. In the situations of default andforeclosure also, they are not rushing into the decision of foreclosure of the property immediately, butconsider all possible alternative outlets and compromises with the borrowers.Obviously, rather than individuals, mostly institutions and LLCs are involved in commercialforeclosures and in dire situations of foreclosures, they tend to select the insolvency route, to escapeforeclosures.In this context, it is pertinent to take into consideration what the experts in the Industry say about thepresent status of commercial property sector and foreclosures. While the predictions about the futureof commercial real estate vary from person to person, there is unanimity among them about thedensity of the problem of commercial foreclosures, presently.According to James Lockhart, vice chair of WL Ross & Co. New York, there are a lot of distressedcommercial properties facing foreclosures with small commercial banks as of date. The probleminstitutions holding commercial properties in their business have increased to 775, whereas therewere only 50 of them, just a few years back.The impact of commercial foreclosures has led to closing of financial institutions in huge numbers. Ofa total of 8,000 U.S. Banks dealing in commercial property finances, already 250 have been closed;
  2. 2. 1300 banks have been advised by the regulators, to reduce concentration of Commercial Real Estateproperty loans; and many of them are expecting closure or taken by stronger competitors.However, in the Real Estate industry circles, it is reported that in a "Sentiment Survey" conductedamong 100 senior real estate personnel by the Real Estate Round Table, during the second quarterof this year, 82% of the participants expressed satisfaction that the commercial real estate market isbetter than last year.encina real estate