27 Mar The Coming Apocalypse in Commercial Real Estate
Who are the winners and losers, and how can they tap into the opportunities and lessen the impacts, respectively?
Unless you live under a rock, there is an apparent global economic downturn, though some countries and industries are performing relatively better than their peers.
Thanks to the high inflation and high interest-ridden marketplace, almost all economies and industries, except a few, are under enormous financial stress.
In this blog, I focus on the upcoming Armageddon in the Commercial Real Estate (CRE) industry, which I’m actively involved in. The current stats and predictions are beyond alarming and very scary! According to the Mortgage Bankers Association: “Twenty percent ($929 billion) of the $4.7 trillion of outstanding commercial mortgages held by lenders and investors will mature in 2024.” The number doesn’t look good for 2025, either.
Yes, there were also $729 billion in commercial loans that matured last year. The problem this year is that the interest rate is very high, making it harder for the overwhelming majority of property owners and investors to refinance, leaving them with the only option to sell quickly to avoid bankruptcy.
Even if the CRE industry is experiencing an overall downturn spiral, not all commercial real estate properties are equally affected. Office properties, for instance, have struggled since COVID-19, and now the current market environment has aggravated their already pitiful situation.
Who are the big winners?
Most of us focus on victims in every crisis. However, there are also people and institutions that may thrive during or after a crisis, even if their numbers are few. In this upcoming crisis in the CRE industry, the BIG winners are investors with liquidity. Cash buyers can now buy properties cheaply. If they prefer to leverage financing, they’ll get loans with better terms than those who don’t have enough liquidity.
Who are the big losers?
- Owners whose loans will be maturing this year will be impacted the most. Those with loans that will mature in 2025 have a little room to breathe and maneuver, at least for now. Who knows? Something miraculous may happen between now and then that may change the situation in their favor a little better.
- Investors who, for whatever urgent reason (s), must unload their properties during this period may also find themselves in a very difficult position. They may sell their properties for pennies on the dollar to avoid bankruptcy.
- Landlords of some property types, too, will be affected greatly. Many have already begun cutting prices. In some markets, they’re cutting up to 75%. How far and for how long can they keep cutting prices while inflation and associated expenses are rising?
That said, if the federal and state governments don’t prevent or mitigate this pending calamity before it is too late, WE ALL will be LOSING in one way or another.
It will have a severe global impact on all industries
Regardless of where we are located, we all should be worried about the pending apocalypse in the CRE industry. Even if we may not have a commercial property whose loan matures this year, we all should be knowledgeable and closely follow what is happening. If you’re an investor or a professional in the CRE industry, you should be on high alert. If you ask me, you should be worried even if you work or operate outside of the industry. Why?
The pending catastrophe is dire for all industries. The fall of CRE won’t be isolated to the industry alone. It’ll have a ripple effect throughout the economy. It will take down other industries together with it to the ground unless some smart interventions are carried out before things blow up in our faces.
If the prediction happens, the fallout may not remain in the US alone. It may have global catastrophic consequences like the one we experienced in 2008. The purpose of alarming you about the pending economic calamity isn’t to scare you. It’s intended to arm you with proper information and give you options so that you not only survive but also thrive in the aftermath of the upcoming apocalypse. Nonetheless, I’d like you to focus on what you can do regardless of what may happen around you.
We shouldn’t fold our hands and hope things go right in our favor without doing our part. We should ask: “What can I do to survive, outlast, and even thrive in this upcoming economic downturn?” The answers to this question should be within our control and scope of influence.
Most of us don’t have control over macroeconomic decisions, such as lowering the interest rate. Very few influence a higher level to cause macroeconomic policy changes. However, we all can prevent or lessen severe damages, at least against ourselves individually and our teams and organizations, if we act intentionally, proactively, and sooner.
Disclaimer: Since discussing what business owners and professionals outside of the CRE industry should do to outlast the pending economic downturn is beyond the scope of this blog, I’ll focus on how our team at eXp Commercial could help sellers, buyers, and investors succeed in meeting their short- and long-term goals during this tough time.
Great opportunities are awaiting institutional investors
Institutional cash buyers are salivating and waiting for Armageddon to happen sooner, hoping to buy properties across the country cheaply. They’re not shying away from talking about it publicly. Some gave interviews openly, sharing their readiness to capitalize on the situation. These investors have excessive liquidity. These cash buyers anxiously await a once-in-a-lifetime opportunity to play big and translate their dreams of owning one of the most important assets, commercial properties, into realities.
However, even if you’re not a cash buyer, you should be aware of the opportunities available to individual investors like yourself. The good news is that we can help you find off-market deals in which the big dogs aren’t interested.
Owners whose loan matures this or next year may not find it feasible to refinance because of the high-interest rate financial environment. They may be forced to sell cheaply unless they use some creative approaches by working with MOTIVATED buyers. Though it is sad to see such owners in such a disadvantageous position, we’ll step in to fill the gap and render a highly-needed service.
We can broker between you and MOTIVATED sellers who must sell quickly at a reasonable price before it is too late, forcing them to foreclose.
A golden opportunity for private investors
Even if you’re not an institutional investor, you should tap into the coming opportunity to buy value-add properties. This is high time to buy off-market deals using CREATIVE FINANCING and hold to:
- Create cash flow.
- Benefit from depreciation.
- Save in taxes.
- Increase the value of the property during the holding period.
- Refinance to get back your (and your other investors’) initial investment or sell with appreciation.
If you’re not interested in actively buying, holding, and managing properties, you can invest with sponsoring syndicates or fund managers
, who may allow you to join them as a Limited Partner. Please note that:
- Depending on the setup of the syndication/fund entity, you may or may not be allowed to invest with a syndicate or fund manager you don’t yet know.
- You may not be allowed in all deals if you’re non-accredited. According to the SEC, individuals qualify as Accredited Investors if they’ve net worth over $1 million, excluding primary residence (individually or with spouse or partner). Or those who have income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year.
- Since talking about syndication/fund is beyond the scope of this blog, please reach out if you have any general questions.
- For any security-related specific questions, you should consult your attorney, more specifically, your securities lawyer.
- You should also consult your CPA for accounting and tax-related questions.
Sellers need to be proactive and strategic to minimize the pending damages
If you’re a seller, especially if your loan matures in 2024, this isn’t the time to wing it. You should be very proactive and strategic before it is too late. Now is the time to evaluate your options prior to finding yourself without enough choices. The good news is that we can help you find the right buyer who meets your needs and criteria. If you’re also selling your business together with your property, we can help you do both. You don’t need two different brokers.
How can we help?
Whether you’re a buyer or seller of CRE properties, we can be your trusted advisors keeping your best interest in our hearts.
- Even if you don’t want to list your property or business with us.
- Whether you want us to represent you to buy a property or business, we can help you as consultants by conducting:
- Financial analysis
- Market analysis
If you’re worried too much about INVESTING or REINVESTING in CRE in this tough financial environment, why not consider buying value-add businesses? Though you may not benefit from some of the advantages a CRE brings, the right business with a potential to scale may give you a higher cash flow during the holding period with a potential sweet exit in 3 – 7 years by:
- Refinancing, or
- Selling, or
- Taking it public.
To learn more about what we do, click here… Reach out also via [email protected] if you have any questions or need further explanation.
Developing change management capabilities
Lastly, change is happening. The future looks uncertain.
However, as the saying goes: ‘The best way to predict the future is to create it.’
To create a future where you thrive, you need to develop your team’s organizational and leadership capabilities.
The good news is that the team at Success Pathways can support you and your team as you navigate the changing landscape in the CRE industry. We can help your team to understand:
- The common nature of changes (crises)
- Different models that explain the various phases of change
- How to prepare to survive and outlast change
- Things to do under each phase to thrive in the aftermath of the change (crisis)
You’re not alone. We can empower you to develop the necessary competencies and resilience. During these tough times, we’re your ally. We can equip you and your team to excel in the midst of current and future changes and crises.
Providing business consultation
What is more? We won’t drop you once you buy your next property or business. If you’re interested, the team at Success Pathways can assist your property management or business management team during the holding period by providing BUSINESS CONSULTATION services to appreciate the market value of the property or business. We will work with you to:
- Create new processes or refine the existing ones.
- Systematize the processes.
- Increase productivity.
- Reduce expenses.
- Scale FAST and get better deals when you decide to sell, refinance, or take it public if it is a business.
Reach out to our team at Success Pathways via [email protected]