Starboard Commercial Real Estate

Hans Hansson | June 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.
Posted 9 years, 1 month ago on June 29, 2010
The trackback url for this post is http://blog.starboardnet.com/bblog/trackback.php/156/

Comments on this post:

Re: Commercial Real Estate Still Stalled due to lack of Credit Options
I think the government really need to take these steps but this cannot be done in one day. It needs proper planning and this could be done in steps. Obama administration has taken some steps to put the property sector in a good position but the results would appear by the end of this year.

2010/06/30 by Dubai Blog wwwReply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/156/44485/
Re: Commercial Real Estate Still Stalled due to lack of Credit Options
Hi

I think 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.

2010/07/01 by Real estate developers in Pakistan wwwReply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/156/44499/
Re: Commercial Real Estate Still Stalled due to lack of Credit Options
Agreed. Property values have already gone down 30% or more. Most of the loans done at 70% would have to already put in the difference in more equity they do not have. Then banks are only doing 50-60% loan to values on top of that.

2010/07/07 by Anonymous • • Reply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/156/44618/
Re: Commercial Real Estate Still Stalled due to lack of Credit Options
Great write up indeed!! Now you can see the Real estate -- commercial and residential -- has become the "dead zone" of the economy. We were hoping that exports might partly take its place, but that hasn't happened. There's some home that domestic private industry might provide some lift, but taxes and health care threaten that. Government employment has been carrying the economy, but with state & local budget cuts that is starting to peter out. Fiscal policy is paralyzed. So?

Obama administration has taken some steps to put the property sector in a good position but the results would appear by the end of this year.

So, around the end of the year I foresee a massive monetary-policy stimulus attempt coming. If you think interest rates are low now, just wait. You ain't seen nothing yet. It's the only bullet we have left. Bad time for the real estate agents.

2010/09/07 by David Leeman wwwReply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/156/45439/
Re: Commercial Real Estate Still Stalled due to lack of Credit Options
How has the Obama Administration done this. I have seen you relaxing of credit restrictions in fact it has gotten worst.

2010/09/08 by Anonymous • • Reply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/156/45464/
Re: Commercial Real Estate Still Stalled due to lack of Credit Options
It is bad News that a perfect storm has developed that could create a long-term crisis in commercial real estate.

2010/09/11 by commercial Real estate buyers wwwReply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/156/45494/
Re: Commercial Real Estate Still Stalled due to lack of Credit Options
Whats more sad is that our politicians are silent on the issue. Case in point Chase Bank is running a promotion stating that they have lines of credit available for businesses. If a business hires up to three people the rate of the line would be reduced as an incentive to hire. Sounds great until you read their fine print. It is subject to a lien on a property under a first deed of trust.

2010/09/13 by Anonymous • • Reply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/156/45525/
Re: Commercial Real Estate Still Stalled due to lack of Credit Options
Property values have already declined by 30% or more. The most loans to 70% of the difference would have had more equity they have not. Then the banks are only 50-60% of the value of the loan company that.If hiring up to three people an incentive to reduce the number of bus hire.

2010/09/27 by maryland real estate listings wwwReply
Comment Trackback URL : http://blog.starboardnet.com/bblog/trackback.php/156/45642/

Comments have now been turned off for this post



Real Estate Blog Top Sites Blog Flux Directory  Real Estate blogs   Top Blogs
Credits: ©2018 by Starboard TCN Worldwide Commercial Real Estate
Powered by bBlog | template by Starboard Commercial Real Estate, inspired by dmig