Powaseller – Yes, some banks, not mine however, have been very lax in making commercial real estate loans as well. There are some banks that have chosen to accept projected income versus actual income on a property to meet the debt service coverage ratio requirements, in order to be more competitive. And some banks don’t require any secondary source of repayment as long as the numbers on the property alone fall into place, albeit with a little nudging on the part of some lenders (but definitely not mine).
If you’re familiar with the conduit loans that are so popular with commercial real estate owners, read my article at http://sandiegobanker.blogspot.com/
It describes something (the part of the article in bold red) in many commercial real estate markets that I think very few people in the profession are aware of, or think much about.
As you know, commercial real estate is bought based on the cap rate, and California commercial properties have been selling at historically very low cap rates of 4%-6.5% because alternative investments have not been yielding much more. But as interest rates rise, so too will the cap rates investors will come to expect from commercial property. If you bought a commercial property based on a historically low cap rate, what will happen down the road when similar properties like yours sell for cap rates 2-4% higher? How will that affect value? For some, the change in value caused to their property could place them upside down if they had a 90% LTV SBA loan or even a 75% LTV loan, especially if the value when they bought it was based on projected income.
Multi-family cap rates are even more ridiculous and have been driven down by investors buying them up at very low cap rates, not for their income, but to convert them into condos where those investors hope to recoup their returns selling them off as individual units. The problem is that it has created sale comps for others less knowledgable who haven’t figured out those comps have been distorted by the intentions of real estate investors who bought those properties for reasons other than income (i.e, condo conversions).
Commercial real estate will be affected as well by any crash (which to me is an overall drop in values of 30% or more) in residential real estate, it will just take longer because most commercial real estate is valued on a leased fee or income approach basis which is supported by generally strong term leases, versus market value in residential real estate, which is influenced more by other factors. But if things go really bad in the residential market, it will affect the general economy as a whole.
Personally, I think this all started in 2001 when Greenspan caused the Prime rate to drop eleven times in that year alone. It was like throwing gasoline on fire when you consider how many people got burned in the stock market and were primed (no pun intended) for another investment opportunity, which Greenspan went overboard to create for real estate in general.
