2008 won’t be great for commercial real estate

Implications: The time has arrived for the U.S. to pay the bill for illiquidity or rather the excesses of the last eight years of Republican economics. The prediction made in the article is for worse times than generally expected sooner than anticipated. The CMBS market is a dead issue right now with $ 750 billion outstanding. Nothing is said of the balances outstanding from other sources generally of shorter durations.

Analysis: Since the fundings accelerated from the beginning of the CMBS market in 1995 under heightened competitive market conditions, the majority of the fundings will be shown to be underwritten to higher loan to value ratios and lower debt coverages. Even if property rents accelerate and manage to keep pace with expense and tax increases, the smaller funding pool will raise interest rates and less aggressive underwriting will drive leverage down and equity yields up resulting in lower prices across the food groups. Expect the majority of the speculative gains of the recent markets to be given back over the next cycle. The greater fool is named in the article to include the development community and Wall Street. The big commercial and investment banks are expected to take another licking as they continue ticking ala sub-prime. Hope there is another round of offshore equity left among the world’s oil barons to recapitalize both American and International institutions. Between China and the Middle East and Singapore and the like, there probably is if there are no other disruptions in another business sector n the near future. Happy New Year to all!