Investors are finding buying opportunities in declining commercial real estate market
A continued decline in commercial real estate prices is bad news for the banks holding distressed mortgages, but good news for investors snatching up bargain properties.
“Investment real estate has long been a cornerstone of wealth building and a means to achieving the American Dream,” said Catherine McBreen, president of MillionaireCorner.com. “Investors realize the current market presents buying opportunities and have been willing to buy commercial real estate despite the many uncertainties surrounding the market.”
Nearly half of the nation’s wealthiest – those with a net worth of $25 million or more – plan to invest in rental property in 2011, according to our research. Forty-four percent plan to buy undeveloped land and 33 percent plan to invest in other types of commercial real estate. Total investment in real estate represents 10 percent of assets with most of the mega-millionaires owning multiple properties.
Commercial real estate prices fell 3.7 percent in April following a 4.2 percent decline in March, according to the Moody’s REAL Commercial Property Price Indices. The index now stands at its lowest level since the market peak reached in October 2007. As prices drop, sales of distressed properties have been significantly increasing, according to the June 2011 CoStar Commercial Repeat-Sale Index.
More than three-fourths of commercial properties that were purchased at the market peak and then resold in April 2011 were sold at a loss. The repeat-sale index is 13 percent below its April 2010 level and 38 percent below its peak in 2007.
Many wealthy investors who held large cash reserves during the recession are now taking advantage of deep discounts in commercial property, according to our research. An impending “loan cliff” may create additional opportunities for buyers. Approximately one-third of outstanding commercial real estate loans – about $1 trillion in debt – will come due within the next two years.
Commercial loans typically span five to 10 years and require a large balloon payment at the end. Current market conditions, including tight credit, and underwater and delinquent mortgages, make it difficult, if not impossible, for many borrowers to negotiate new loan. Further bank losses and distressed sales could result as liquidations continue to move through the market.