The other shoe is ready to drop

It’s hard to go a day in the real estate world without hearing about the woes of the current housing market. Residential properties are far from out of the woods. Tax breaks have expired for home buyers, and the government is scaling back on buying mortgages on the secondary mortgage market. This will only further slow the residential recovery that continues to have high default rates and an unprecedented overhang of properties on the market. What little light we saw during recent months of home buying increases may soon be dimmed due to expired tax breaks, rising interest rates and a continued high volume of foreclosures and bankruptcies.

The next shoe is unfortunately already dropping with massive defaults in the commercial market as high unemployment is holding down spending and store closures are putting many retail properties at risk of default. In the May/June issue of Commercial Investment Real Estate, writer Beth Mattson-Tieg quotes Real Capital Analytics, starting as of February 1, 2010, total troubled retail assets amount to $43 billion.

Some markets such as Dallas Fort Worth report a 60 percent increase in commercial real estate foreclosures from this time last year. Steve Brown, a writer for the Dallas Morning News, recently reported in an article from May 17 that $880,000,000 of commercial real estate is scheduled for foreclosure in Dallas Fort Worth in June alone. These properties include office, retail, apartments, industrial buildings and land.

When you multiply this by the many struggling markets across the nation, you get a glimpse of the scope of the problem.

What does this mean to buyers and sellers of commercial properties? I believe this will continue the need for the transparency of the open outcry auction method to establish a “real time” value for these properties. I also believe we will see a similar occurrence to what we saw coming out of the mid to late 1990s where investors bought and held prime commercial properties. When the recovery occurred, they made handsome profits on those purchases. It is an unprecedented opportunity for buyers. It will take holding power and courage, but hey, nobody ever said making money was going to be easy.

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~ by Craig King on June 1, 2010.

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