The real problems with Commercial Real Estate

To put the current commercial real estate market into perspective we need to distinguish the troubles of commercial real estate from those of residential real estate.  Residential real estate bubbled like no other asset over the past 5-10 years.  The bubble was fueled by government intervention into lending markets encouraging lax lending standards and a breakdown in government regulation for the underwriting of RMBS collateralized product.  This resulted in a massive run-up in prices and eventually a glut of unwanted product.  

GDP Shares Construction

The above chart displays the extreme difference between the commercial and residential construction markets. Whereas residential overbuilt to a never before see extreme, commercial did not and if anything under-built.  This is not to say that commercial real estate is not making its way through a difficult market, but it is a distinction that shows underlying health in CRE and will allow our market to rebound much more quickly than residential.  

Of course the other componenet to the state fo the market is loan defaults, which hapeen to be at their historical highs of 1.8%.  That means we are at a low for loan performance of 98.2%.    

What needs to be tweezed from the data on CRE defaults is that they are maturity defaults as opposed to term defaults.  Typical CRE is financed in five year periods with 30 year amortizations requiring refinancing in 5 years.  The Wall Street Journal failed to make this distinction in their article published this week on the topic.  So the problem with Commercial borrowers is not a problem that they can’t meet the terms of their loans it is that they can’t find new sources of funds to continue ownership.  Banks are too scared to renew their commitments.  

I found this post set me off on this topic and also is the source for the graph above.  

As for Newark, NJ what does all of this mean?  I look to the commercial real estate development as a % of GDP to answer this question.  Newark was certainly at the short end of the line for commercial development over the last 20 years.  It did not experience the extreme highs of the recent market boom.  Newark is fertile ground for new commercial development and as we “de-funk” and get back to stable ground Newark will be a focus for many developers of Multifamily, office, hotel and industrial.


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