What appeared to be the worst possible case a few weeks or months ago, for many commercial real estate developers and owners, now appears to be the most likely and negative outcome; vacancy rates are rising sharply with effective rents falling, similarly, with financing options dwindling. Some predict 2009 to be the worst year since ‘91-’92.

None of this news is a good formula for success, but below you will find a few potentional short-term solutions.

Here is an incredibly insightful and prophetic article from the New York Times’ Charles Bagli, as we kick off 2009: As Vacant Office Space Grows, So Does Lenders’ Crisis:

Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders. With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market since the wrenching 1991-1992 industry depression.

The Facts:

• The Real Estate Round-table sees a rising risk of default and foreclosure on an estimated $400 billion in commercial mortgages that come due this year, 2009.

• Already, $107 billion worth of office towers, shopping centers and hotels are in some form of distress, ranging from mortgage delinquency to foreclosure, according to a report by Real Capital Analytics.

WHAT OWNERS ARE TRYING TO DO:

• The Normal Paradigm: Owners typically pay only the interest on loans of 5, 7 or 10 years and refinance the big principal payments necessary when the loans come due.

• Few Options: As the result of falling vacancy rates and declining rents, and without new financing, owners will have few options other than to try to negotiate terms with their lenders or hand over the keys to banks and bondholders.

• The good news: Building owners are by and large making their loan payments. It is the refinancing that is worrisome.

• The Genesis of the Problem: Most loans were made at 50 percent to 70 percent of property values. At the top of the market in 2006 and 2007, though, some owners took advantage of available credit and borrowed 90 percent or more of the value of a property, a strategy that works only in a rising market.

• Reality: Since 2006 and 2007, respectively, property values have dropped 20 percent.

• The Solution, for now: Where possible, owners are trying to extend loans. A lender might agree to extend the term on a 10-year commercial mortgage, for example, if the borrower remains current on payments and can make an equity payment to compensate for the decline in the building’s value.

Tags: commercial real estate

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