Deciding to refinance depends solely on the value of the real estate property. If the property was acquired a few years ago, it would be difficult to refinance, as the terms could be much different. Also, the value of the property may have declined. If this is the case, the owner may have to increase his equity.
Currently, we’re experiencing a circular challenge in the lending community. It’s clear that our government is placing pressure on lenders to lend, but the terms presented are ones investors are unwilling to accept, thus lending is at a standstill. This will hopefully improve over the next 24 months.
Commercial Real Estate in the Cold?
It looks as if commercial real estate executives need to face the realization that federal dollars will not be used to clear debt off lenders’ balance sheets. The Troubled Asset Relief Program (TARP), a measure many believed would open the clogged financing floodgates, was suddenly snatched away this past November. Treasury Secretary Henry Paulson declared that purchasing illiquid mortgage-related assets “is not the most effective way to use TARP funds.”
But there’s still a sliver of hope that the Treasury will help troubled commercial real estate debt. The injection of TARP funds would start to create the stability we need, but it would also cause issues such as an excessive budget deficit and going from deflation to inflation.
What Lies Ahead
In the first half of 2009, further deterioration in real estate fundamentals will force many investors who are still clinging to unrealistic asking prices to swallow a bitter dose of value correction. At the same time, buyers will have to settle for annual returns based on existing income streams rather than the skyrocketing price appreciation that made commercial real estate golden earlier in the decade.
The best way to survive the credit crunch is to not rely on debt. If investors need debt to close a transaction, they should use cash of at least 50 percent of the acquisition price. The lesson we’ve learned has been as simple as it is painful: Leverage is good, but only in moderation.
H. Michael Schwartz is the chairman and CEO of Strategic Storage Trust Inc., a publicly registered, non-traded REIT with a portfolio that includes more than 1,800 storage units and 196,000 rentable square feet. The company’s sponsor is U.S. Commercial LLC, which manages a growing portfolio of 5 million square feet of commercial properties, including 2.9 million square feet of self-storage. For more information, visit www.strategicstoragetrust.com.