How to Analyze a Commercial Property Investment Opportunity: From The Old View

"We're all hearing from brokers, real estate experts and gurus that now is the time to buy Commercial Real Estate. Asking prices have dropped 40%, 50%, 60% below loan amounts. ""Buy now and make millions!"" What we're hearing is that they are counting on resurgence in equity again. Remember this same song in 2006?

How many Pro Forma's do you see that take a building and show you how it will make this amount in year 1, this amount in year 2, and so on? I wish I had that crystal ball! This is just a theme from the bad old days when prices were being driven up with the same argument that equity will make the building worth more in the future. You should never buy Real estate based solely on equity growth - especially now. If we are to learn from the past, let's get some real investing savvy here.

Fundamentals - Supply and Demand. In some markets there are simply too many buildings of a certain asset class and too many buildings of a certain asset class for sale! Decreasing occupancy rates to the 80% range, decreasing rents rates, and incentives to keep building occupancies up, mean that multi-family buildings in these markets will not have a great equity gain for many years to come.

With values below loan amounts, building incomes down, and balloons coming due, banks are receiving pressure from the feds to liquefy these non-performing loans. Short Sales and REO's are predicted to continue to rise while taking hundreds of regional banks with them. Lenders continue to try to push loans out as far as they can, which is a temporary measure to shore up their books. According to Elizabeth Warren, Chairperson for The Congressional Oversight Panel, there are 2,988 regional and sub-regional banks that are in real trouble with underwater loans. These banks are carrying $1.7 trillion in commercial paper that will reset in 2010, 2011, and 2012. There will be even more supply when these loans come due.

Investors must look at the fundamentals of each micro-market and each individual building. That's not to say that there maybe individual buildings that are performing well, however, any kind of equity growth will take longer in some markets while other markets will rebound more quickly."

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