I'm sure many of you have had the same experience that I have lately- lamenting that not only is my favorite shop on the corner closed, but so are several others in the same building and many more businesses around the city. Here in Seattle it's a bit unnerving as I see all of the "For Lease" and "Closed" signs in shop and business windows- in fact it feels eerily like walking through a graveyard looking at headstones.
Do you remember that horrible Tsuanami in Thailand several years back, when witnesses all said "the sea just disappeared" before the giant wave struck? Well, a sea of businesses have disappeared, and according to some, the giant tsunami wave that is about to hit is the wave of commercial real estate foreclosures, which could do to our already weak economy what that wave did to the seaside villages.
According to a recent article in the Wall Street Journal, Federal Reserve and Treasury officials are working to prevent the commercial real estate sector from "delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat". At issue is the downturn in commercial business that is beginning to drive property foreclosures- the delinquency rate in July for commercial loans rose to 3.14%, more than six times the level a year earlier. Just like what happened the past couple years in residential real estate, banks lent commercial owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising, which hasn't happened as a result of the recession, and owners are beginning to struggle making payments as vacancies increase. Nor can owners refinance easily, by the end of 2012, the WSJ article predicts that $153 billion in loans are coming due, and close to $100 billion of that will face difficulty getting refinanced. Until now, banks have been able to manage commercial real estate losses by extending debt when it has matured, because the underlying properties were generating enough cash to pay debt service. Unlike the residential market, banks have had an incentive to refinance commercial loans because accounting standards for these have enabled them to avoid marking the value of the loans down.
In a related New York Times piece, author Terry Pristin notes that "even though industry lobbyists were able to persuade Congress to extend a loan program aimed at prodding the stalled securitization market back to life, several analysts said it was unlikely to head off a spate of defaults, foreclosures and bankruptcies that could surpass the devastating real estate crash of the early 1990s. It will prop up a few deals, but you can't stop the wave that's coming", the article quotes from Peter Hauspurg, the chief executive of Eastern Consolidated, a New York brokerage firm.
Some experts point to this as somewhat of an expected trend, as commercial real estate often follows residential downturns during a recession, as job losses and business cutbacks sink demand; however, what we're navigating has been no ordinary recession, and with the job market recovery yet to be clear, this commercial downturn could be just extraordinary.
So if you find a "For Lease" sign in the door of your local donut shop in the morning, don't expect a new one to replace it anytime soon. In fact, in this current economy, you're better off hanging on to that $1.50 anyway.
---------------------------------------------------------------------------------
About RD House Real Estate and Property Management: We are a leader in relocation, in-town condo and executive Seattle rental properties, working with Microsoft, Amazon, Fred Hutchison Center, the Bill & Melinda Gates Foundation, Alaska Airlines, Nordstrom and others. Many of our listings have video blogs/tours, and can be found on our website at www.rd-house.com.
If you are a Corporate relocation specialist and in need of help placing clients or employees, please contact our relocation team at (206) 728-6063.
RD House Real Estate and Property Management
Leaders in Property Management
159 Denny Way #110
Seattle, WA 98109
(206) 728-6063
www.rd-house.com
;)
;)
