What is the effect on commercial real estate? Lending policies have clearly changed. Interest rates are higher; loan sizes (relative to underlying real estate values) are smaller; and fewer transactions are occurring.
This is in spite of the fact that the key barometer of commercial real estate – i.e., overall economic health and the resultant demand for office, industrial and retail space – remains strong.
We were fortunate to make it under the wire in terms of our mortgage financing for Firewheel Village. We funded the loan in May, and our key loan terms would not be available in today’s lending environment. These key terms include:
- Interest rate of 5.70%, fixed for 10 years
- Loan size relative to property cost = 77%
- Loan payments are “interest only” for the entire 10 year loan term, meaning that we just pay interest and not principal to our lender every month. This allows us to have more cash available for dividend distributions and reserves.
The re-pricing of real estate because of the credit crunch does extend beyond the housing market. Commercial real estate values are being impacted. Sellers that are not in a hurry to sell are sitting on the sidelines.
What is the implication for Nexregen and Firewheel Village? We have very favorable financing in place for the next 10 years, so there is no near-term flashpoint of having to refinance or sell the property. Our forecasted holding period is from 3 to 7 years, depending upon market conditions. We will be looking for the best window of opportunity to sell, starting 3 years from now.
Will the current credit crunch still be lurking in 3 years? Will the demand for commercial real estate be strong in 3 years? No one has the answers to these questions. Again, however, it is our game plan to monitor the sales markets starting 3 years from now, and sell when we can generate the best possible return for our shareholders.
It is important to emphasize that the majority of our compensation as investment sponsor is “back-end” weighted. Our interests and those of our shareholders are aligned; we want to make as much money as possible both for your sake and ours. In the meantime, we intend to ride out the current credit crisis.
Let’s Build Wealth Together. That is what it all comes down to.
Labels: cb richard ellis, commercial, credit, finance, harold hofer, ray wirta, real estate, sub-prime
