Are we deep in a commercial real estate crisis or a debt crisis? It is, in my opinion, both! The debt crisis was created by those owners, developers, investors or speculators who leveraged the tons of cheap debt in 2005 to 2007!Now we have begun to see what is being called" The deleveraging process."
In some quarters there are between $1 Trillion and $2 trillion of commercial real estate debt which is scheduled to mature between now and 2013. Massey Knakal of NYC indicates that between $600 billion to $1.2 billion of debt must be withdrawn from the market.
Much of this "deleverging" will occur in the form of distressed note and property sales.
"Some historical economic and capital market proven truths:
1. Debt is wonderful when all goes well, but extremely punishing when things go wrong.
2. Debt rollover renewal is the real risk of using short term debt, not an increase in the interest rate.
3. Recessions and capital shortages are never Incorporated into financial models, but are often incorporated into reality.
3. Real estate is a long term asset ( even though your planned holding period may be short) and therefore requires substantial amounts of equity in order to provide an appropriate asset-liability match.
5. When money is available for everything from everyone, soon thereafter there will be no money available from anyone for anything.
6. When money is easy, the benefits accrue to the sellers, not the buyers.
7. When fear replaces greed and people seek absolute safety, all assets prices are essentially correlated and diversification does little good.
8. Any rapid changes ( e.g. spike in demand for condos and second homes) attributed to demographics must be wrong, as demographic changes move through the system at glacial speed.
9. Your worse case scenario is not even remotely the worse that can occur.
10. When you think that things are too good to be true, they probably are.
As these rules were forgotten and aggressive plays were made and we have witnessed a cataclysmic busting of the bubble."
Thank you Massey Knakal!
Bill McInerney
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