News & Research Archive

Commercial Real Estate Still Stalled due to lack of Credit Options

Jun 29, 2010

 

A year after the Obama Administration announced that it would be working on freeing up credit options to create more available business credit, as part of his stimulus and jobs program, nothing has happened. Banks continue to cut lines of credit and continue to have no available funds for anything-from acquisitions to tenant improvements. Without an improvement in credit options the commercial real estate sector will not recover and could crash just like the residential sector.

A perfect storm has developed that could create a long-term crisis in commercial real estate. During the expansion of property acquisitions pre 2008, a number of loans were done at 70 percent loan to value at the highest price levels that market cycle had achieved. Now as property prices have seen price adjustments of 30% or more, lenders are not willing to offer new loans or refinance opportunities at less than 60% loan to value. This means that a property owner, with a loan due, is looking at having to commit additional equity-which most owners do not have now..

But problems for a building owner do not end with refinancing or looking for financing to acquire real estate. It also involves being able to complete tenant improvements and make future deals. Banks are simply not willing-or not able to make these necessary loans..

So what is going on? The Obama Administration has been talking about freeing up credit, but quite the opposite has been happening. Regulators are forcing banks to increase their cash reserves. With banks struggling to increase deposits, they have little available cash to loan out. But there is a bigger strategy going on; the government is lending money at near zero rates to banks, which in turn are buying government debt at 3.5 percent. This has allowed banks to return to profitability at an added cost to the taxpayers. Once the banks have improved their cash reserves-the plan is then to begin the process of foreclosing on commercial properties and to introduce these properties back in the market, on a much more coordinated basis-in hopes that this will allow property values to hold more steady in order to reduce the amount of anticipated loss.

This strategy is flawed from the beginning-it is essentially making banks become real estate companies. The more prudent plan is to have government guarantee a higher percentage of debt to loan ratios, similar to an SBA type program. This will allow existing owners to keep their properties, support higher property values, and create confidence with investors overall in the commercial market sector.

Next the government should offer low interest loans for tenant improvements. This will allow building owners to compete for new tenants, while also creating more construction jobs, along with starting growth in so many other sectors: architects, brokerage, legal, moving companies, furniture vendors, phone and data companies and everyone else that is tied to a commercial sale or lease.

The government needs to get on the side of private business, not create government controls that is working against it.

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Written by: Hans Hansson

E-mail: hans@starboardnet.com


Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 25 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email hans@starboardnet.com or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.

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