Are you hearing the same euphoric chorus I’m hearing—the praises of the current real estate comeback? With the lowest interest rates in decades and plenty of capital in the market, it may be easy for some commercial real estate professionals to join in the refrain of “Happy Days are Here Again.”
Well, I hate to be one of the few voices singing in-and-out of tune, but there are some present, fundamental issues in real estate that continue to cause me concern. Even against the exuberant background songs extolling low cap rates and abundant capital, consider these dilemmas that may come back to bite the CRE sector:
• Low leverage is good, over-leveraged is bad. Morningstar reports that more than $52 billion in CMBS debt is still in special servicing (delinquent) as of February 2013. Although delinquencies are trending down, approximately $45 billion is anticipated to mature in the coming 12 months, with approximately 36 percent still lacking sufficient debt coverage to refinance.
• “Texas has recovered.” It sure feels like it. Leasing is up, construction has launched on several new projects, renovations are going strong, and acquisitions and dispositions are at pre-recession levels. Yet some of the most aggressive underwriting has been done on Texas deals. According to Morningstar, out of the $10.9 billion in loans on the current watch list (which consists of 1,234 loans), almost $5 billion (or 444 loans) come from the Dallas-Fort Worth region.
• Keep it humble, and remember where we’ve been. Not too many got through the last recession unscathed. Although LTV’s of 85-90 percent aren’t common yet, we are starting to see them creep up from 75 and 80 percent.
• In a number of real estate segments and geographic markets, there’s been little recovery or stabilization. Some speculate that cities like Las Vegas may never fully recover, and few investors are jumping into secondary and tertiary markets. There is still a void in small loans, with small investors still struggling to find new equity to recapitalize investments.
• Global markets are moving. Global markets are still uncertain, with many making bold moves to strengthen their own economic and political agendas. Governments are bankrupt or not out of the woods, leaving many asking how the actions of others will impact the U.S. economy in the coming months and years.
I’m certainly not saying we’ve heard the last verse in this upbeat hymn of a well-capitalized and improving real estate cycle, but I have my concerns that too many investors and lenders are “singing from the same page in the hymnbook” and doing deals that may come back to haunt them. As we move forward in this more opportunistic time, remembering lessons learned from the past will help ensure a more prosperous future.
Tanya Little is founder and CEO of Hart Advisors Group LLC. Contact her at [email protected].
