Federal Reserve Chairman Ben Bernanke announced last week that he will attempt to hold interest rates low in an effort to help the housing market rebound. There is a growing concern that as the first time home buyer tax incentive ends in April, 2010 that residential real estate sales will plummet to all time lows. There is also a concern that defaulting commercial loans could have an even larger negative impact and could cripple our economy more.
Many residential housing experts predict that after April that the residential housing market will come to a grinding halt, prices will drop like a rock, and residential inventory will begin to skyrocket. We currently have 17.1 months of inventory in Lane County compared to a truly healthy inventory that is closer to 3-6 months of inventory.
The Mortgage Bankers Association says that delinquencies and home repossessions have hit a new high. Based on a recent article from Scott Reckard who indicated that job losses have created the most pain, and we will continue to see a surge of foreclosures through the rest of 2010. The residential losses also spill over into the commercial arena.
Last month a large Investor in New York gave back to the bank 11,450 apartments in a bulk purchase that was created in 2007 for over $5 billion dollars. That was the largest commercial foreclosure for multifamily to date.
Locally, banks are still pulling in their horns regarding commercial lending and their appetite for risk. As their risk tolerance decreases and they continue to become cautious, they also continue to increase their debt coverage ratios.
Commercial lenders have always determined the amount they will loan on a property based off a debt coverage ratio (DCR) however they would also typically quote a general required down payment (ie. 20% down payment).
In the past most banks would require a 1.10 to 1.15 DCR but now they want closer to 1.25 to 1.30. What does that mean to you an Investor? You can figure that the Lender will want probably close to a 35% down payment if not closer to 40% or higher. It varies from property to property based on net operating income, expenses, and the lender’s DCR requirements.
Economists generally believe that the nation is in the early stages of a slow recovery, and there is prediction that interest rates will go up. We have also seen Capitalization Rates (Cap Rates) rise for multi family by .50% (from 7.5% to 8.00%) in just the last two to three months.
Cap Rates and the asking prices for commercial properties are the inverse of each other, so as cap rates go up the suggested asking price of property continues to drop and I don’t think we have seen the bottom of the market for commercial real estate yet!