According to The Washington Post, a significant percentatge of Washington DC area office buildings are financed with loans that were packaged into commercial mortgage-backed securities with maturities in the next 5 years.  The risk is two-fold.  For one, lenders are not lending.  Secondly, commercial real estate values have dropped significantly.  So, if somebody could get a loan, the loan to value (LTV) ratios will be significantly off.  This could also lead to difficulty in an owner’s ability to sell because lenders will demand more cash the next time these properties change hands.

The good news is that companies like cLenderX provider brokerage services to help willing lenders hook up with willing buyers and refinancers.  Our sophisticated and proprietary ”commercial deal assessment tool” helps lenders evalute risk and identify the best and safest opportunities in which to invest.  This gives lenders greater confidence in lending money and, as a result, faciliates more commercial loan transactions.

According to Charles Bagli of the New York Times, vacancy rates in office buildings exceed 10 percent in virtually every major city in the country, which is another sign of economic distress that could lead to yet another wave of problems for troubled lenders.   

Indeed, as I drive through the suburbs of Northern Virginia and Washington DC, I can clearly see through the empty windows of brand-new and still vacant office buildings.

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 economy is in the midst of a domino effect.  Step back and look at the problems plaguing this country from Wall Street to the residential housing collapse to the automotive industry to the commercial retail sector and now to the commercial real estate industry.  President-elect Obama was probably correct in his prediction that things are going to get worse before they get better.

Indeed, both America’s and Wall Street’s next crisis my indeed be the commercial real estate crisis.  The bad news is that vacancy rates for commercial office space will continue to remain in the double digits.  The other piece of bad news is that lending will continue to be tight in the commercial sector.  

The good news is that we will likely see some bargains coming onto the market very soon. The other good news is that if any banks or lenders are lending, cLenderX will help you prepare your lending application in such a way as to maximize your chances of successfully funding your loan.

If you are looking to invest in commercial real estate, you may also want to lean towards multi-family residential properties in that many homeowners are leaving their foreclosed properties and many would-be home buyers either cannot get a mortgage or are afraid to buy right now, which is putting pressure on the residential real estate rental market.  Vacancy rates for residential rentals are steady and possibly on the way down, which is good for landlords.

According to Multi Family News (MFN), the median price for multifamily properties in Los Angeles fell 35.1 percent from Q3 2007 to Q3 2008.  Prices for multifamily commercial investment properties are at 2004 rates.  At the same time, rentor demand for individual units is on the rise.

The transition from home owners to renters

On the consumer side, homeowners are walking away or being forced from their homes and into rental situations.  At the same time, would-be homeowners are struggling to acquire mortgage in the face of stiffer regulations and tightening of restrictions. 

According to a loan officer at Bank of America, even loan applications with 700+ credit scores are being denied loans unless they have a 20% down payment.  In the current economy, not many people are able to come up with $80,000 to purchase a $400,000 condo.  If people do have the cash they certainly don’t want to tie it up in a property that may be difficult to sell later on.   With the inability (or lack of desire) to purchase a new home, more potential homeowners are moving into rental situations. 

Most people can rent an equivalent dwelling for significantly less than the cost of owning.  Renters do not need nearly as much money up front to get into a rental than a home.  And, many people fear losing equity or tieing up their equity in a home that may be difficult to sell for many year.  Consequently, demand for rental units is expected to remain strong for several years.

However, when financially smart investors purchase multfamily properties, they can achieve an economy of scale and enjoy better rates per square foot than buyers of single residence properties.

The perfect multifamily investment opportunity

For multifamily real estate investors, this is the perfect time to invest.  Smart investors can obtain a multifamily property at bargain basement prices.  It is inconceivable that prices can continue to drop beyond 5 year lows.  At the same time, financially smart investors can enjoy higher than average opportunities to lease individual units. 

So, what is your resolution for 2009?  Hopefully, researching and investing in multifamily properites is on that list.

As I reflect on the current financial crises and residential mortgage meltdown of 2008, I cannot resist a few thoughts.

First, anybody who is over 40 years old and has lived in the United States most of his life should be able to remember previous real estate cycles. I remember in the early 70’s when we moved from LA to DC and my parents were paying mortgages on two properties. We couldn’t get rid of our Huntington Beach property, one of the most desirable homes we ever owned, for $35,000. In 2007, that home had peaked at around $1,000,000. Today, it’s probably closer to $750,000 – a steal! While I was getting in and out of the real estate market and flipping homes every 6 months between 2003-2005, I kept telling people that the party was going to end soon. Few people believed.

Second, this whole real estate bubble feels so much like a pyramid scheme that I had to look up the definition of a pyramid scheme and draw some similarities and conclusions.

Traditional pyramid scheme

According to Wikipedia, which is obviously the world’s most credible and authoritative source of information ;-), a pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, often without any product or service being delivered.

Pyramid schemes exploit greed and gullibility. A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula.

Such ”businesses” seldom involve sales of real products or services to which a money value might be easily attached. However, sometimes the ”payment” itself may be a non-cash valuable. To enhance credibility, most such scams are well equipped with fake referrals, testimonials and information. Clearly, the flaw is that there is no end benefit. The money simply travels up the chain. Only the originator and a very few at the top rungs of the pyramid make significant amounts of money. The amounts dwindle steeply down the pyramid slopes. Of course, the worst off are at the bottom of the pyramid: those who subscribed to the plan, but were not able to recruit any followers themselves.

Ponzi scheme vs pyramid scheme

There is virtually no difference between a ponzi and pyramid scheme other than a ponzi scheme is named after Charles Ponzi, charged in the early 1920’s of bilking investors through pyramid schemes.

Multi level marketing (MLM) versus pyramid scheme

In MLM, there may actually be a product associated with the business but it often smells like a pyramid scheme.

The correlation between the real estate bubble and a pyramid scheme

Contrary to its name, real estate is not really real. You don’t really “own” a house when you “buy” it. Instead, you mortgage the house and only a few pennies a month goes toward actually paying down the principal (what you owe against the mortgage) of the home.

Like a pyramid scheme, money travels up the chain. The people cashing in are not the ultimate consumers or tenants of the real estate. It is typically the lawyers, brokers, bankers and investors.
Also like a pyramid scheme, the worst off are those at the bottom, who subscribed to the plan but are not able to recruit any followers themselves, i.e., the last home buyer before the bubble burst cannot find any new buyers.

Personally, I am glad that I got out in late 2005 and have no plans to get back in any time soon. I think residential values will stay flat, if not drop even a bit more through 2009 and early 2010. I’m banking on a slow and steady growth of residential home values starting around 2011. If you can grab a bargain in the meantime then go for it.

The biggest problem I see with buying a single family home nowadays is that lenders are so skittish that they are not lending unless you have a solid 20% down payment AND a rock-solid FICO, which means well into the 700s. There are plenty of people with 700+ credit scores, although they are a dwindling group but how many “normal” people have 20% down payment. Take my childhood home in Huntington Beach that sold for $35,000 in 1977 and $1,000,000 in 2007 but is valued at $750,000 in 2008. It is a normal, i.e., small and ordinary, 3 bedroom home tucked away in a suburban neighborhood. How many average American have $150,000 plus closing costs to purchase this home?

In the past, the only way to get that kind of money is to cash out on the sale of your previous home. But, since you can’t sell your existing home then you’re not gonna get the down payment required to buy up. And, if you are a renter, likely you don’t have that kind of money either. This is the freezing up of the credit markets that will continue to stall residential real estate transactions and extend the flattening out of real estate prices over the next couple of years.

Mortgage Bankers Association (MBA)

Sponsor Info: Call MBA at (202) 557-2740

Commercial/Multifamily Capital Markets Winter Conference

December 4 - 5, 2008
The Ritz-Carlton, Washington DC
Washington, DC M2902023
Call MBA at (800) 793-6222, select option 3
Exhibitor Info: Call MBA at (202) 557-2790

Accounting, Tax & Financial Analysis Conference

December 10 - 12, 2008
Mandalay Bay Resort & Casino
Las Vegas, NV
Call MBA at (800) 793-6222, select option 3
Exhibitor Info: Call MBA at (202) 557-2790

CREF/Multifamily Housing Convention & Expo

February 8 - 11, 2009
Manchester Grand Hyatt San Diego
San Diego, CACall MBA at (800) 793-6222, select option 3
Exhibitor Info: Call MBA at (202) 557-2790

National Mortgage Servicing Conference & Expo

February 17 - 20, 2009
Tampa Convention Center
Tampa, FL
Call MBA at (800) 793-6222, select option 3
Exhibitor Info: Call MBA at (202) 557-2790

National Technology In Mortgage Banking Conference & Expo

March 15 - 18, 2009
Mandalay Bay Resort and Casino
Las Vegas, NV
Call MBA at (800) 793-6222, select option 3
Exhibitor Info: Call MBA at (202) 557-2790

Pollina Corporate Real Estate, located in Chicago, provides full service brokerage and consulting firm, representing corporations in real estate matters on a national and international basis.  Recently, Pollina published an excellent and well-researched report on the Top 10 States for Starting a Business in the U.S.

Pollina provides the following services to its commercial real estate clients:

Office and Industrial Brokerage

Real Estate Market Analysis

Negotiations

Lease Management

Financial Analysis

Strategic Planning

Location Analysis

State and Local Incentive Negotiations

Construction Consulting

Workforce Development Analysis

Surplus Property Analysis

State Business Climate Comparison

State Incentive Program Comparisons

Regional Economic Development Organization Development

Corporate Real Estate Seminars

According to Fitch Ratings, a commercial credit ratings agency, commercial mortgage delinquiencies rose only slightly in June, 2008. Both office and retail mortgage defaults are still below the commercial mortgage delinquency average, despite their increases in June. Multifamily homes continue to account for the most delinquencies among commercial mortgages.

Each month, Fitch reviews delinquencies among commercial mortgages backing securities it rates to determine the sector’s delinquency rate.

LOS ANGELES - August 3, 2008, Invest Wisely Inc, announces the upcoming release of www.cLenderX.com, a commercial lending tool designed to automate the underwriting process.

cLenderX is computer-driven process for soliciting essential property, borrower, and loan information to assist commercial lenders in screening and qualifying commercial lending opportunities. cLenderX catapults this process well beyond that of any other automated commercial loan origination on the market. Within minutes of completing the process, dozens of world-class commercial lenders are notified of potential commercial brokerage opportunities and bid on the opportunity to serve commercial borrowers and investors.

Founded in 2007 by Brian Evans, Blake Newman, and Daniel Burns, Invest Wisely is doing business as cLenderX to serve professionals in the commercial mortgage lending industry.

I read a very interesting article titled, “Commercial Lending: Global Trends and the Systems that Enable Them,” published by Celent, a research and consulting firm focused on the application of information technology in the global financial services industry.