According to recent posts from Business Alabama and the National Real Estate Investor, the commercial real estate industry has had nine consecutive years of growth with forecasts for this year predicting another year of “modest growth”. Banks have enjoyed record low delinquency rates at 0.5%. However, economists are wary that 2020 and 2021 could produce challenges in the event of another downturn.
According to Chief Economist for the Certified Commercial Investment Member Institute and Director of Research at the Alabama Center for Real Estate at the University of Alabama, K.C. Conway, Commercial Mortgage Backed Securities (CMBS) are “struggling to execute a hundred billion dollars’ worth of new issuance.” Thus, CMBS has become more selective. Retail is out, new hotel construction…out, they didn’t tick the right boxes. Why is that? Allen Tidwell explains how construction financing is different. The loan is not allotted in one sum but in stages of progress as needed. Their concerns revolve around the record high of construction loans coming due in 2020 and 2021.
Other concerns revolve around the following:
- Rising risks
- loan to costs exceeding 90%
- regulators not paying attention
- potential corporate downgrades
- construction costs outweighing market value
Conway says, that while he expects the 2020 challenge to come when borrowers move construction loans to permanent financing the “banks are unlikely to fall into the financial abyss they did last recession.” In addition to his remarks on CRE markets, the banks do have more capital than before to absorb it, in the event it occurs. Even with these concerns other markets continue to thrive in CRE. Senior living and assisted living are still sought by Government Sponsored Enterprises. Long-term office leasing, selective multi-family, and primarily industrial are still doing very well.
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