November 5th, 2009

Commercial Real Estate Remains Grim, But is Bottom Near?



The reckoning is finally on the horizon
-Richard Green

Commercial real estate (CRE) experts know that their market will be in shambles for months (if not years) to come. However, a recent survey reveals that many industry professionals believe that the market will hit bottom in 2010:

Real estate industry leaders who are meeting at the Urban Land Institute’s annual gathering in San Francisco are more optimistic than they were at this time last year because they can see the reckoning finally on the horizon, said Richard Green, director of the USC Lusk Center for Real Estate.

While forecasts like this are certainly important to regenerate interest amongst investors and developers who would aid in the market’s recovery, there are several variables which can derail any time line for recovery.

Take residential real estate for example. Analysts have been calling for a bottom for months now, while some may feel as though we haven’t even reached that point yet. We feel that forecasting a bottom to the CRE market could be an especially daunting task.  If an actual bottom in the residential market remains uncertain despite numerous foreclosure efforts, Federal tax credits for homebuyers, and artificially low mortgage rates, how soon could the CRE market recover with out any of those?

Those surveyed said they expect, and hope, the U.S. government will take a more active role in regulating the real estate industry. But they are not looking to the government to solve the crisis with something like the housing tax credit or the Cash-for-Clunkers auto program that helped those industries.

Besides industry professionals not expecting a handout, we’ve already speculated that Federal entities like the Federal Reserve, the Treasury and the FDIC aren’t in position to provide the kind of support housing has been given; as we mentioned in September:

Towards the end of 2008, the meltdown in the financial and mortgage markets led to a credit crisis that froze lending nationwide. For a while now analysts have been forecasting another looming credit crisis — this time it has to do with the commercial real estate market. Finance and economic blogger Calculated Risk predicted declines back in December 2008.

However, what makes this “latest” threat to U.S. lending institutions particularly dangerous, is that several Federal entities — from the Federal Reserve, to the Treasury, to the FDIC — are financially stretched to their limits, and may be unable or unwilling to provide adequate support to lenders if or when the time arises.

Want to learn more about commercial real estate? Be sure to read our post “Commercial Real Estate: Credit Crisis #2?” Our story delves into the details behind the market’s breakdown, its rapid decline, and the structure that makes commercial real estate loans different that residential loans.

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3 Responses to “Commercial Real Estate Remains Grim, But is Bottom Near?”

  1. Mitch Says: November 8th, 2009 at 1:52 am

    As they said on Saturday Night Live this evening, saying we’re near the bottom is like saying we’re almost at Disneyworld when we’ve just pulled out of the driveway at home.

    The truth is that we are close to the bottom, if only because, at some point, there aren’t going to be any more houses that can be foreclosed upon and prices can only fall so far. Where those points will be is the issue, and no one can really answer that question universally.

    Unfortunately, there are two other realities. The commercial real estate bust is just around the corner, which isn’t going to help employment any. And, until jobs come back, which I just can’t figure out how it’s going to happen unless there are higher penalties on companies that outsource jobs to other countries, it’s going to continue getting worse before that bottoms out as well.

    Bleak, eh? I’m wishing for the best still.

  2. Tim Manni Says: November 9th, 2009 at 1:05 pm

    Hey Mitch,

    Good to hear from you. Great analogy, haha. I agree with your stance on how the importance of job growth is weighing on the other markets. Outsourcing isn’t a topic we’ve covered much…maybe it’s time to start.

    Good hearing from you,

  3. business property Says: November 26th, 2009 at 2:58 pm

    yeah,what makes this “latest” threat to U.S. lending institutions particularly dangerous, is that several Federal entities — from the Federal Reserve.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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