Real Estate Valuation Expert Witness On The State Of Commercial Real Estate

In Continental Valuations News, real estate valuation expert witness Robert D. Domini, MBA, MAI, writes:

Not only is there a natural fallout from an auto recession, but this time around the domestic auto companies have run out of money, although Ford has survived so far without Government funds. GM and Chrysler are being forced to close dealerships. GM is shedding divisions as we speak.

Commercial real estate owners are facing a double whammy. They are not only fighting higher vacancy, lower rents and higher cap rates, but they are also facing restricted debt options. As the economy continues to shed jobs at a rate of 650,000 to 700,000 per month, investors will face ever greater challenges. According to Deutsche Bank, the conduit lenders are facing 3.5% delinquency and expect the figure to reach 6% by the end of the year. The peak rate during the early 90s was in the 6% to 7% range. So, with 5-year rollovers coming due, investors face much tighter underwriting standards amidst declining prices, cash flow, rents, etc.

The aggregate delinquency rate at the present time is about 1.8%, so if this figure goes to 7% by the end of this year, the number of loans delinquent will more-than triple in the next eight months. I’d say that’s a fairly rapid deterioration. The hotel sector is holding its own better than any other segment at the present time, but most hospitality research firms are predicting 10% to 20% declines in Net Operating Income. Newer, 2006, apartment complexes are experiencing very high default rates while more mature complexes are holding up well thus far. As commercial real estate continues to deteriorate, look for Commercial Mortgage-Backed Securities market to experience problems. Let’s hope the Government doesn’t run out of money.