Once Bitten, Twice Shy: Commercial Real Estate’s Slow Slog to Recovery
On the heels of developer Ron Moelis’ grim pronouncements about real estate finance to The Times, Grant Thorton has issued a white paper forecasting a commercial real estate recovery in 2011 “at the earliest.”
“[Commercial real estate] industry fundamentals remain weak,” reads the report. In part, that’s because the real estate industry generally lags behind the larger economy during recoveries. But that’s not the entire story. Unlike the recovery following the 2001 recession, this recovery—when it finally arrives—will be severely hampered by the lack of both market demand and financing:
The various players in the CRE industry are in a stalemate of sorts. Not enough buyers for CRE assets currently exist, especially if one excludes so-called vulture investors. The lending community is delaying foreclosure procedures and sales of real estate-owned properties as a result of depressed values. These factors foster an environment of stagnation in the CRE industry, and companies may be tempted to limp along and simply survive. However, the CRE industry is about to face a post-recession paradigm it has never seen before. The recovery following the 2001 recession is not a good benchmark because access to capital may be much more severely constrained. Approximately $1.4 trillion in CRE loans will mature during the next four years. The lending market will probably be flooded with demand, while higher loan-to-value ratios, tighter credit standards and an uncertain securitization market may limit refi nancing opportunities.
More generally, real estate is no longer seen as an unfailingly good investment, according to Grant Thorton’s Paul Melville, the white paper’s principal author.
“People will be a little bit more cautious about heading into property and real estate, compared to how they were originally,” Mr. Melville told The Observer. “The memories and the scars will last a while.”
For a sobering read, click here.