One critical element for a healthy and prosperous commercial
real estate market is readily available and affordable financing. In the
economic boom of the last decade, debt financing was easy to find, lending
standards were easy, borrowers could do no wrong, and everyone made money. That
trend, like all business cycles, was bound to end sometime. Unfortunately, the
commercial real estate market turned much harder and much faster than almost
anyone could have anticipated and debt financing nearly dried up.
So what happened? Prior to the bust, lenders relied on the
income generated by the property being pledged as collateral as the primary and
sometimes only source of loan repayment. If a borrower was unable to pay back
the loan the lender could foreclose, sell the property, and get its money back.
Two interrelated events occurred that revealed the flaws in this process.
First, rental rates fell. As the Great Recession hit, many businesses
experienced decreasing revenues and could no longer afford inflated rent or
loan payments. Second, property values began to decline because the income they
generated was decreasing. Many borrowers couldn’t make their payments and
lenders were not able to cover their losses by foreclosing and selling the
properties. Many lenders experienced huge losses and reacted by tightening
lending standards to the point where qualifying for new financing became nearly
The good news is that many of these problems have worked
their way through the system. The economy is expanding, albeit slowly, and most
lenders are back on solid financial footing. Debt isn’t as easy to obtain as it
was before the bust, but lenders are making more loans.