Commercial Market May Fare Better Than Residential

By David Weisman, Esq.
Board Certified Real Estate Lawyer 
October 2009

The storefronts of almost every community are lined with signs advertising space for rent. Construction projects sit partially completed with either weeds or tall grass dotting the landscape. Signs advertising new buildings sit fading in the sun. The commercial real estate market is not in good shape.

The question is often asked if the commercial market will be as badly affected as the residential market, with as great a number of mortgage foreclosures, abandoned properties and general problems. While it is no secret that there are problems with the commercial market, it is unlikely that those problems will devolve to the degree of the residential market for several reasons.

First, commercial lending has been slightly saner during the time of rising prices. With the residential market, the biggest problem was that property owners were buying at top prices or were refinancing at top values based upon appraisals that were available to the residential lenders. The lenders relied upon what appeared to be sound valuations, but the market corrected itself and the values fell. Conversely, commercial appraisals are more conservative, more complex and take into account a variety of factors, such as the income generated by the property and the potential cost to reconstruct the property. Therefore, it was less likely that commercial loans based upon overvalued property would flood the market.

Secondly, commercial lenders tend to have a more direct relationship with their customers and typically are willing to work with customers at the early signs of trouble. In many cases, commercial lenders are entering into modification agreements extending the maturity of loans, particularly loans extended for the acquisition and development of new projects. These lenders recognize that the projects were not started or have not been completed with the diligence contemplated by the initial loan documents, because the developer was wise enough not to bring the product to market during this difficult time.

Finally, commercial lenders do not want to own the commercial properties. Because most commercial property owners will not abandon the property when there is difficulty, the lender has an opportunity to allow the owner additional time to rebuild his or her business or to market the property for sale, while allowing the owner to manage the assets. This way, the lender is not forced to employ personnel to maintain and manage the real estate while it is being marketed for sale.

Much has been written lately about looming maturities and the inability of projects to be refinanced. The attitude of most lenders who are willing to extend maturities should soften this perceived crisis.

Probably the most at risk segment of the commercial lending market is related to the residential crisis. This segment consists of those lenders who were aggressively lending to homebuilders, condominium developers and condominium converters. These loans were structured to be short-term while the property was acquired, built or fixed up and re-sold at a rapid rate. Very often, these loans are designed to be repaid within 18-24 months. The inability of the developer to sell the units results in the inability to pay the loan.

With the exception of these distressed properties, it does not appear that prices have been slashed to record lows or that sellers are accepting the first offer that comes along. There are still buyers with cash who are hunting for bargains, but it does not appear that the normal commercial properties are being sold at bargain basement prices.<

As credit loosens up and money is more available for commercial lending, activity will pick up, property will change hands and dormant projects will awaken. With everyone having been burned a little bit, it is likely that everyone in every segment of the market will tread lightly.

A native Floridian, David Weisman has been board certified in real estate law since 1987 and is peer-rated "AV" (the highest rating available) by Martindale-Hubbell. Mr. Weisman's broad-based real estate practice includes commercial leases, commercial acquisition, financing closings, real estate development, tax-deferred exchanges, landlord/tenant disputes and zoning and title issues. Contact Mr. Weisman at 954-491-1120 ordavid.weisman@gmlaw.com.