Many people ask what is going to happen to Commercial Real Estate.  Since the early 1990's Real Estate, in general, has experienced healthy growth, but with the latest debt market debacle, the first signs of change may be evident.  The Residential market has certainly calmed down since April (2006), however, the Commercial world has not experienced much change until the past few weeks.  And what has happened, in layman’s terms, is the faucet for capital flowing through the debt market has come to a halt.  It still remains to be seen for how long the faucet will be trickling rather than experiencing constant flow as in the past several years.

While I don't want to get into why the debt market has been so good over the past few years, it will be very interesting to see what the next eighteen months has in store for borrowers.  In my opinion, Lenders have become very lose with their underwriting standards and they are just now realizing they need to tighten up their policies because of what has happened with a few “bad apples” in the sub-prime lending market.  The truth is that real estate fundamentals are still strong, unemployment in NJ is relatively low and stabilized, and consumer spending has not materially changed.

So what does this mean?  This means that some uncertainly is looming in the marketplace and long-term rates have slightly increased, and this is beginning to slow down the movement of transactions.  We may face a larger disconnect between what Sellers are expecting to receive for their assets in comparison to what Buyers/Borrowers are willing to bear, and thereby negotiating pricing downward or deals may simply fall through.  One example is a transaction that a friend of mine is currently involved with; the Buyer secured their financing by locking in a rate, and the Lender came back and re-traded the deal; they did not honor the rate that was promised.  This is putting a "monkey wrench" in the deal and the Buyer is going back to the Seller looking for a price adjustment.  I asked him what the Buyer’s intentions would be if the Seller did not provide this adjustment and I was told they may simply walk away from the deal!

I think that by keeping an eye on where long-term mortgage rates (ie.10-Year Treasury) move in the next couple months, it will be easier to determine what will happen in the world of Commercial Real Estate.  My guess is that long-term interest rates will remain higher than they have been, pricing is going to flatten and possibly decrease, but no substantial change should occur over the next several months.  One thing to keep in mind is that the buzz on the street has been that interest rates have been at a forty to fifty year low; this leaves only one direction for them to move in…  The difficult thing to predict is exactly when this will take place.  The sub-prime debt market debacle is the first sign of a movement in that direction, and only time will dictate if we remain on this path and for how long!

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