Our November 2008 AccuVal AdVisory™ article, Continued Decline in Economy across All Sectors Batters Real Estate Industry, addressed the impact of a falling economy and credit crisis on the real estate industry. Every indication shows that there will be no relief forthcoming in 2009.
In a recently published report by the National Association of Industrial & Office Properties (NAIOP) Research Foundation, Commercial Real Estate Development Contributes Significantly to Nation’s Economy, office, industrial and retail development annually contributes $549 billion to GDP. This report confirms that a healthy real estate economy is vital to a prosperous U.S. economy and has an immense effect - providing wages and jobs that quickly roll-over into increased consumer spending.
Until recently, the commercial real estate sector had managed to avoid serious consequences. But with the credit crunch, continued economic crisis and cash flows from commercial property slowing down, 12 large real estate groups have sent a letter to the U.S Treasury seeking aid. Their letter dated November 26, 2008, includes a request for federal assistance in the form of an “extension of the Term Asset-Backed Securities Loan Facility (TALF) to guarantee, finance or purchase highly rated, asset-backed securities collateralized by newly or recently originated commercial real estate mortgages”.
Investment in all types of commercial structures has slowed down after several years of growth. Prices of office and retail properties have fallen from last year’s peak. Many commercial mortgages were packaged and sold as asset-backed securities, and funding for projects has dried up because these markets are now all but closed. Prior to the credit crunch, the banking industry’s central lending activity was in commercial real estate. In summer 2008, it accounted for 24% of the industry’s loan book, or $1.7 trillion, compared to 28% for residential real estate.
Additional worries result from a decreasing number of lenders providing money. Commercial mortgages are usually underwritten for a period of 5 to 10 years, with large payments due at the end. With very limited lending activity, these are real and justified concerns to say the least. Every commercial or real estate market will be affected in different manners and at different levels. In some areas, rental rates are declining and vacancies increasing, due in part to growing layoffs and falling profits. This will lead to companies giving up office space, closing offices and/or going out of business.
In the past, when a business hit hard times, owners negotiated with banks or refinanced their loans. But many banks no longer hold the loans they made. Over the past 10 years, banks have at times bundled mortgages and sold them to investors. Pension funds, insurance companies and hedge funds bought seemingly safe securities and are now expecting losses that could further impact the financial system.
Two factors are looming in the future of 2009: a continued decline in construction spending and the tumbling of property values. Combined, these two factors could place additional burdens on an economy already in peril and hamper the ability of financial institutions to lend the money necessary to propel the economy forward. The worsening economic conditions, especially in retail and other service related sectors will continue to hurt the real estate industry indirectly.
When an industry is seeing historical changes or transitions in an economy resulting in tighter regulations and monitoring, reliance on accurate and timely information becomes key. AccuVal has experience in 100 industries and can provide the information necessary to support any financial transaction. Read more about how AccuVal can help you to reduce your tax liability by challenging the assessor’s valuation in this economically challenging time.