The owners of commercial real estate are currently experiencing a funding crisis that is threatening their ability to refinance maturing loans. At a time when the need is the highest on record, available cash to meet these needs has dwindled. If it isn’t located quickly, loan defaults will be an inevitable side-effect.
The Need
Foresight Analytics estimates that approximately $814 billion in commercial mortgage loans will mature within the next two years – with nearly $180 billion maturing this year. Never before have such a large number of commercial loans come due within the same year and the need will only grow in 2011 and 2012.
This documented need means that the owners of commercial properties in the South Florida real estate market will have to find a way to refinance or face the possibility of loan defaults or forced sales. With commercial property values down 25%-40% from their market highs, commercial property owners cannot easily sell.
Funding Problems
At the same time, lenders are facing a crisis of their own: what to do with loans once they are made. Traditionally, commercial real estate loans are bundled into packages of loans that are sold to investors on the open market as Commercial Mortgage-Backed Securities (CMBS). However, the market for these instruments has completely dried up, to the point that just two years after a record $221 billion worth of CMBS were issued, none have been issued thus far in 2009.
Because lenders are unable to sell these loans, they have been forced to severely curtail new loans, including refinance loans. This decline has been dramatic: When the commercial real estate market peaked, $33 billion per quarter in commercial loans were being originated; in 2009 we are on track for only $25 billion through the first half of the year.
Options for Borrowers
This leaves the owners of commercial real estate very few real choices:
- Ask their lenders to extend the maturity date of their loan by one year (for credit-worthy borrowers) in the hope that credit markets will loosen within the next year – which will then put more pressure on the market due to the even larger number of loan maturities expected in 2010
- Sell properties that have lost 25%-40% of their value in the last two years and may not be generating positive cash flow due to declining rents and occupancy
- Face foreclosure due to an inability to make burdensome balloon payments
- Locate another funding source and pay premium rates of interest
Real Solutions
It is becoming increasingly clear that more and more borrowers will be forced by market conditions to seek one of several funding solutions made possible by forward-thinking commercial real estate professionals with experience locating assets and funding to meet a multitude of client needs.
These solutions will provide borrowers with the cash they need in order to refinance their maturing mortgages and will also provide investors with better-than-average returns on their investments with terms that provide them with maximum security.
While the government is doing what they can in an effort to stabilize the commercial lending market, this process will take time to filter down to street level. In the meantime, reputable, experienced real estate professionals can provide workable solutions that equally benefit borrowers and investors in the South Florida commercial real estate market.
