Commercial property, like its residential property brethren, boomed between 2002 and 2007. Now, as we are traversing the long plateau of the Great Recession, commercial property in California has lost approximately 40% of its value since the 2007 peak, a bane to owners of apartment complexes, office buildings and malls alike.
On a positive note, lenders of distressed commercial properties are increasingly motivated to restructure the bad commercial loans on their books rather than foreclose on the underwater properties and take an immediate loss. These restructurings generally take the form of extending the loan terms or due dates of a final/balloon payment, a modification structure called extend-and-pretend in real estate parlance.
During the first quarter of 2010, lenders restructured $10.5 billion of commercial real estate debt nationally, up dramatically from the $2.2 billion for the same period a year ago. The loans on 49% of newly distressed commercial properties were restructured in the first quarter of 2010, up from 13% over the same period last year.
The length of the average final/balloon payment extension is also growing. Many payments are being put off between two to seven years, up from the 30- to 60-day extensions that were the norm in 2009.
With $1.4 trillion commercial loans coming due in 2014, distressed commercial property owners can certainly use all the help they can get.
first tuesday take: Like many residential purchasers during the boom, a large volume of nonresidential property investors were suckered into adjustable rate mortgages (ARMs) with final/balloon payment conditions – short-term loans to finance long-term investments. The time to renegotiate due dates or refinance is rapidly approaching for many owners of income property who are growing increasing anxious.
No segment of the California real estate market is immune to recessions, be it residential or commercial. As happened during all previous recessions, the job-loss ripple is being felt everywhere. It’s an unavoidable truth: job losses decrease employers’ need for space. And while this explains why commercial real estate is stagnating now, it is also an omen of the immediate future – commercial real estate can do nothing but flounder until jobless numbers in California find bottom and employers see reasons to hire again. [For more information addressing the relationship between employment and real estate, see the April 2010 first tuesday article, Jobs move real estate.]
Re: “Banks Embrace ‘Extend and Pretend’ as U.S. Hotels Await Rebound” from Bloomberg.com