What About Commercial Financing?

My first post of the year was optimistic and I continue to be looking forward to 2009. However, it does not mean that this year is not going to be really difficult. As 2008 was the death year for residential real estate 2009 maybe the year for commercial real estate. A good friend of mine, a hard money lender, made the point yesterday that he believes 2009 will be dramatic for commercial real estate. He believes that commercial properties have been over valued and with company failures numerous properties are going to be in default.

In an AP article “Down we go again: Faint…” the reporters goes over the most recent financial news and numbers and it does not look good. Bad results mean that companies are not going to expend and in numerous cases are going to contract. When companies need less space for offices, retail etc.. less income is being generated thus properties ability to service debt is reduce. More property owners are going to find themselves in difficulties and may decide to let their investments go.

Commercial real estate is in part regional and in part based on national trends as we are seeing a general downturn, we should expect a general downturn in commercial real estate. However, some regions maybe much more affected than other and in some cases for different reasons. Clearly Michigan is going to suffer tremendously even if the different auto companies stay in business. Areas with more diversified economy may see a smaller downturn than areas that are less diversified.

Commercial hard money lenders are going to be very selective with the type of financing they are approving. Not only we are going to be more demanding in regard to the general quality of the deal but, it is going to be more and more difficult to finance properties that are in distress situation. There will be still some flexibility available, however, this is not something that we should be expecting. In addition, as the demand for private money continues to increase, we should all be expecting that the financing process to move at slower pace than what we are used to.