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When will commercial real estate prices crater? – Orange County Register

At their very essence, commercial real estate values are the result of a price a buyer with reasonable motivation will pay and a seller is willing to accept. Easy enough.

Let’s layer in some complexity, however, as the previous statements assume the buyer will actually write a check for the purchase. In reality, most buyers seek financing for their buy,  which sets in place an approval process by a lender.

Typically, lenders — short of Aunt Mabel who taps her trust fund for you — will require an appraisal, regardless of the size of the down payment. So if the buyer and seller agree to a price and the lender’s appraisal doesn’t conform, the transaction has an issue? Yes. Absent another buyer who is willing to assume the previous buyer’s price but without a lender, the seller must reduce his price and the buyer must inject additional cash to bridge the gap or something in between. So, the first cause of a drop in pricing would be: the property won’t appraise.

But, what are some other reasons?

A spike in interest rates. An obvious result of an increase in borrowing costs would be higher payments. Higher payments — which fewer buyers can qualify for financing — means fewer buyers, and less competition equals a drop. A spike in interest rates also could also cause business activity to decline. The resulting lack of business could place less pressure on a company’s need for space. With demand for space subsiding and fewer interested buyers, prices drop.

The Black Swan event. Transactions generally spike when prices are increasing or when they are falling. When prices are on the up, sellers win. Buyers score when the reverse happens. Uncertainty — I’m not doing anything until this is resolved — is a result of the Black Swan event such as a war, a collapse of student loan repayment, terrorist attacks on our soil, foreign leaders who launch a missile, a government shutdown, or a county bankruptcy – as we experienced in 1994 in Orange…

Read the full article from the Source…

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