Now is the best time to buy commercial real estate in decades
Now is one of the best times to buy commercial real estate in the history of the United States. You may be a bit surprised or even skeptical to hear this, after all, the economy and financing are still troublesome. Let’s explain why despite these challenges now, it really is a once-in-a-lifetime opportunity to buy commercial real estate.
Financing purchase operations
First, purchase transaction financing for owner-occupied loan applications (ie, for your business) is viable, and much more so than other types of commercial mortgages. The government has stepped up to support these programs, which has allowed these loans to remain viable. The terms of these loan programs are solid with 90% financing and low, long-term fixed rates.
Second, the secondary market, where commercial mortgages are sold, for these government-backed loan programs, is very healthy and the demand for these loans is strong. This allows banks to finance your loan instead of turning around and selling it for a nice profit, and recoup your principal. So they can go out and finance another loan; because they have enough liquidity available to do so.
Keep in mind that other commercial mortgage programs, such as conventional, investor, etc., are still difficult. Refinancing transactions also continue to be problematic because 1. Property values have dropped substantially and 2. The loan-to-value requirement has also dropped substantially. These two components have created an almost perfect storm to make it difficult to finance refinances.
Owner-occupied purchase transactions are the main exception to the credit crunch. With a purchase, you are not trying to justify value, you are establishing value with the agreed upon purchase price. So if your business is cash flow positive and you have 10% cash to invest, you should be able to finance your commercial real estate purchase.
Property values at record lows
Property values have dropped 30-40% in the last 3 years. Historically, after a down cycle, such as after the Savings and Loan Crisis, property values rose rapidly again, after the banking environment stabilized. We believe that the same dynamic will occur here. After the commercial mortgage-backed securities (CMBS) market is fixed, for conventional investor deals, money via Wall Street will quickly return to the market, allowing for more relaxed underwriting standards and more aggressive funding for all loan applications. In turn, property values will increase.
Keep in mind that in 2010 we have already seen a doubling of transactions (issuances) in the CMBS market compared to 2009. Sure you can say that the total amount in 2010 is much less than what happened in 2006 or 2007, but IT IS arriving. back. And never bet against the creativity and greed of Wall Street. More importantly, the investor demand is there: The challenge has been finding a loan application that fits your current underwriting standards.
Many business owners will be kicking themselves in a few years for not taking advantage of one of the best opportunities to buy commercial real estate since the Great Depression, or at least since the S&L Crisis.