The credit crisis has changed for the time being how commercial/investment real estate is bought and sold.
As one mortgage broker friend of mine opined at a meeting yesterday morning: "If you need to borrow money, bring cash!"
As silly as that sounds, its not far off the mark. The credit mess caused by the residential derivatives market virtually shut down the issuance of commercial mortgage-backed securities. Capital is scarce, and hard money lenders have emerged. Hard money lenders are private sources of revenue.
What is amazing in the credit controversy is how delinquencies rates on commercial loans remain low. Not unexpected. But change on the horizon is how they are rising. Increased defaults are frequently occurring, according to Realtors Commercial Alliance, even though payments are being made on a timely basis.
"Lenders are labeling loans as 'non-performing' because of a perceived decline in market-to-market collateral value, and demanding that borrowers come up with cash to cover the short-fall." Accordingly, says RCA, the number of defaults are increasing. This situation contrasts grealy with the situation facing homeowners in default, who most often could not pay their higher resetting mortgage payments.
So what to do? There still are great opportunities out there. Reconsider your source for investment funds. Self-directed IRA/401(k) monies can be used to invest in income-producing properties. Look at particular sectors in which to invest. As I have stated ad infinitum on this blog, multifamily remains a strong investment category. Home sales are at a 12-year low and foreclosure rates continue to rise but may be leveling off soon. As a result, the demand for rental units remains strong. Office and industrial vacancies will likely rise, but there still are good opportunities on the horizon.
I have real doubts about any net positive affect of the Obama administration's "stimulus package" upon commercial/investment real estate. right now, the public is learning that there are a lot of boondoggle projects in which stimulus money has been injected.
In talking to some potential investors recently I heard two reasons repeatedly being given as to why they are holding back on investing just yet. First, the belief that we have not yet hit bottom. Frankly, I think we are near that trough. I would get in now only if the price makes sense. Not necessarily that you can get a "steal," but that the numbers work and there is a strong upside when the economy recovers. Second, I have heard more than one person say they are waiting for interest rates to drop farther.
Sorry to bust your bubble on that one, but that ship has sailed. Interest rates are on the rise and will continue to increase over time. We also are facing the prospect of massive inflation, in my opinion, because of the spike in the money supply. By some estimates, there is four times the amount of money in the economy right now (can you hear the U.S. Mint printing presses running round-the-clock?) than at any time in recent history.
My advice? Hook up with a knowlegable real estate adviser, and look at a number of investment possibilities.
