Commercial Property Owners Beginning to Walk Away
Commercial Property Owners Beginning to Walk Away
As predicted, commercial property values have taken a beating in many parts of the country and as a result there owners are defaulting.
Just as the residential sector has taken a bath during the past 2-4 years in most parts of the country, it has been predicted that the commercial sector would follow...and it is!!!!
Economically, this poses significant challenges to an already strained banking/lending industry. One obvious difference is the mere size of these loans that will be defaulting. They will easily dwarf the size of defaulted debt in the residential sector, based on loan amounts and gaps in valuation. Additionally, commercial loans, unlike residential loans do not have 30 year amortizations. Loans are set over a 15 year terms or terms that are usually much shorter than a traditional residential loan. Many are beginning to come due over the next 12-18 months and beyond.
Most banks are in no position or have the appetite to renew these loans, or renegotiate the terms of the existing loan, especially if it means that the bank will take a hit on terms, value, loan amount etc. Further complicating this challenge is the fact that many of the smaller commercial loans were underwritten by local community banks (often the most vulnerable). They are least capable of taking the kinds of losses that would adversely affect their balance sheets and subsequently this will increase the challenge of meeting the minimum loan loss reserves, forcing them to close. All of which will put further strains on the local lending community and the economy in general.
While individual property owners are busy trying to maintain and manage thee own real estate plight, bigger economic challenges in the real estate market and overall economy lie ahead.
Finding creative forward thinking solutions to offset the next wave of defaults will be critical in minimizing the impact it will have on the US economy.
Just as the residential sector has taken a bath during the past 2-4 years in most parts of the country, it has been predicted that the commercial sector would follow...and it is!!!!
Economically, this poses significant challenges to an already strained banking/lending industry. One obvious difference is the mere size of these loans that will be defaulting. They will easily dwarf the size of defaulted debt in the residential sector, based on loan amounts and gaps in valuation. Additionally, commercial loans, unlike residential loans do not have 30 year amortizations. Loans are set over a 15 year terms or terms that are usually much shorter than a traditional residential loan. Many are beginning to come due over the next 12-18 months and beyond.
Most banks are in no position or have the appetite to renew these loans, or renegotiate the terms of the existing loan, especially if it means that the bank will take a hit on terms, value, loan amount etc. Further complicating this challenge is the fact that many of the smaller commercial loans were underwritten by local community banks (often the most vulnerable). They are least capable of taking the kinds of losses that would adversely affect their balance sheets and subsequently this will increase the challenge of meeting the minimum loan loss reserves, forcing them to close. All of which will put further strains on the local lending community and the economy in general.
While individual property owners are busy trying to maintain and manage thee own real estate plight, bigger economic challenges in the real estate market and overall economy lie ahead.
Finding creative forward thinking solutions to offset the next wave of defaults will be critical in minimizing the impact it will have on the US economy.
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