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Why Multifamily Real Estate Market Has Not Reached Bottom

Banks still remain four-square against the idea of marking their toxic assets to market. Along those lines, they are actively resisting attempts to adopt rules that would push them in that direction. Many of these banks have loans for land, incomplete development projects, and underperforming commercial properties (that is, underperforming in that the properties cannot generate income sufficient to cover debt service). Corus Bank is the most recent FDIC-induced casualty of these ill-advised loans.

Corus, formerly known as River Forest Bancorp, had only 11 branches. But it ventured out across the country in recent years, gaining a reputation for aggressive lending to finance condominium projects.

At the peak of its lending activities, in 2005, only 5 percent of its loans were for projects in the Chicago area. Instead, most of its loans were in the hottest markets at the time — markets that have since suffered sharp declines. A total of 29 percent of the loans were in Florida, and 20 percent in California. New York City and Washington each had 14 percent of the portfolio, and Las Vegas had 6 percent.

Financial institutions are not going to mark their assets to market anytime soon, unless law requires them to do so, or the equivalent of a gun is pressed against theircollective heads. After all, their stock would further plunge, other banks are refraining from marking to market, and they would be run out of town on a rail.

Upton Sinclair said it best: “It is difficult to get a man to understand something when his job depends on not understanding it.”

Until that time, the commercial real estate market, including the multifamily asset class, will not, cannot hit bottom. The market needs these properties to come to market so they can be purchased. Once they are purchased, benchmarks will be set, and lenders will feel more comfortable lending based upon those benchmarks — the very benchmarks they obstruct.

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