We don't like to remember the recession and real estate crisis of 2008, but let's think back on it for a moment. From 2007-2009, the total transaction volume of commercial real estate dropped by nearly 87%. Why? A nearly completely frozen debt market.
What is a Frozen Debt Market?
Forget any images of Elsa you may have. This is a different kind of frozen. When the debt market is frozen, getting loans is nearly impossible. From 2007-2009, lenders simply were not offering lines of credit to potential commercial real estate buyers because lenders perceived the risk as too high.
Commercial real estate is typically purchased or constructed with a combination of debt and equity—usually more debt than equity. When debt is difficult to obtain, investors and developers have a harder time financing their deals. Moreover, when a debt market is frozen, market liquidity suffers, creating a domino effect in the market.
What Does an ‘Illiquid' Market Mean?
When the real estate market is weak, and the principal amount of a property's debt becomes due, the owners typically find themselves in one of two scenarios, neither of them good: 1) If they sell to pay off the loan, they likely will not have many potential buyers; or 2) If they don't want to sell, they'll have to refinance the property, but their property probably won't be valued for as much as they hoped.
In the first scenario, with fewer potential buyers, the offers will almost certainly be lower than they would have been in a strong market. Lower offers mean less money for the seller, which means it will be difficult for the seller to pay off their loan.
In the second scenario, if the property owner chooses to refinance and the property is valued at less than it was before, the owner will have to come up with a sizable amount out of pocket to make up the difference between the refinanced loan and the existing property debt.
The current market situation makes it very difficult for property owners to predict what will happen next and to plan their next move. It's more important than ever that current and potential property owners have reliable advice from wise, experienced counsel. Melvin Monachan is an experienced New York real estate attorney who understands this unique market and can help you adjust your investments and plans accordingly. Call (347) 389-1682 or contact us online today.
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