Traditionally, trends in the commercial real estate market follow those in residential real estate by six months to a year. This was probably the case in the Tampa Bay market when the real estate bubble burst in 2007. However, the problems with residential and commercial are fundamentally different, and their return to viability may not follow the traditional pattern.
The problem with residential real estate is that many properties are seriously upside down. In the boom years from 2000 ? 2007, buyers were encouraged to take advantage of 100% financing offers and to purchase the most expensive properties for which they could qualify. Homeowners with equity were encouraged to refinance and use their equity to enjoy the good life while they were still young. This approach maximized the incomes of real estate and mortgage brokers but, as the last four years, was a fundamental mistake in a cyclical economy.
This trend exacerbated the problems of the dip in prices to the point that homeowners who were able to afford their mortgage payments were walking away from their homes because they could not see the market recovering enough for them the make back their investment.
The commercial real estate market has different problems. 100% financing and refinancing for the good life did not happen with commercial real estate. Commercial mortgages were 75% ? 80% mortgages with balloons. In the boom years, with lots of new construction and homeowners spending the inflated equity in their residences, business flourished. Office complexes and shopping centers were at near capacity. When the real estate bubble burst, many of the business tenants went under; others downsized, consolidated, and closed branch operations. When the balloons on their mortgages came due, commercial property owners who had always been current on their loans saw that the properties on which they had gotten 75% mortgages were now upside down (although by not nearly as great an amount as residential mortgages) and instead of being 90% occupied, they were now 60% occupied. With those numbers, refinancing and the end of the balloon period, which had been routine, was now impossible.
Mortgage lenders have responded better to the commercial real estate problems than the residential. With the approval of federal bank regulators, many banks are ignoring the balloons on their commercial mortgages and allowing commercial borrowers with problematic problems to continue to make regular monthly payments as if there had been no balloon. Others are have been willing to enter into realistic mortgage modification agreements.
Because of this, recovery in the commercial real estate market should not be as prolonged as the recovery necessary in the residential real estate market. Do not be surprised if commercial rather than residential real estate recovers more quickly over the next couple of years.
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