After gorging on cheap capital and overleveraging in the mid-2000s, the commercial real estate market will hit bottom sometime in 2012. There will be an oncoming tsunami of defaults and foreclosures because of an inability to restructure debt along with declining occupancies and rental income.
To date, the government has propped up lenders with huge infusions of cheap taxpayer money, which has kept the institutions solvent (this highlights the concept of “extend and pretend”, which is more commonplace in today’s market), but has not had the effect of either loosening lending or correcting the problems. Eventually the banks and the Special Servicers (CMBS market) will have to jettison their portfolios, increasing the supply of available product while at the same time further depressing prices.
And the timing could not be worse, as many of the 400 or so banks on the government’s ‘watch list’ will become insolvent dumping their assets at auction prices. Add to the above equation the inability to obtain borrowed money at anywhere reasonable loan-to-value ratios and the lack of a replacement market for the moribund $200B a year CMBS market and you have the ‘perfect storm’.
Did I mention job growth – no, as there will not be any anytime in the near future? I am always intrigued by hearing about our ‘jobless recovery’ if it is in fact a recovery at all; as what recovery isn’t jobless? Doesn’t industry gain business before hiring employees and to date we have not been gaining much business. When we do, first you will see a growth in average hours worked per week, then you will see an increase in temporary employment and finally a growth in permanent jobs as business feels comfortable that their growth was not an anomaly, but truly an economic turnaround.
So what is the good news – there isn’t any.
What should investors do if interested in commercial real estate acquisitions – wait.
Keith Munsell 
