While foreclosures on loans made to homeowners are well underway (about 40% completed for this recession in California thus far), income property owners have only started to experience the negative cash-flow pain of the current recession. Until job loss is reversed (something not guaranteed in 2009-2010, the first stage of recovery from the recession), vacant and emptying income property will remain vacant, and owners will continue to take losses on their property well into 2012 and 2013.

So far this year, Fitch Ratings reports that $36.1 billion in securitized commercial mortgages have been transferred to a “special servicer”: an agency that specializes in handling troubled loans on income property. Six percent of all commercial loans are currently in the hands of such a servicer. Unfortunately for owners, ordinary loan servicers often have no authority to restructure commercial loans until the loans are transferred to a special servicer. By that point, the loan is already in trouble.

first tuesday take: A flood of involuntary sales of income property is surging for two reasons, in addition to continuously declining gross revenue:

  • due dates on wrong-headed short-term loans (for a long-term investment); and
  • the need to cash out equity in a plan to consolidate debt (and salvage some assets in the process).

2010 will be a great time for cash heavy investors (with mortgage bankers in tow) to fill their pockets with income property bought on the cheap, and 2011 will be still better. The reason: income properties coming into the market for sale have a common problem—a loan (or two) due within the next 12 months. Both the owner and the prospective buyer are not just fighting over a fair price to be paid in this highly destabilized income property market (capitalization rates have soared), they are both also dependent upon a loan modification (or refinancing) to make the deal. Lenders are joined in the same fitful dance, since they have to decide whether to modify or lend. Modification discussions at first seem promising, but then that promise quickly gives way to reality.

Re: “For commercial real estate, hard times have just begun”, from The New York Times