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What’s The Biggest Barrier to U.S. Commercial Real Estate Recovery?

A recent survey taken among investors, brokers, and owners revealed that lack of access to debt financing is the #1 barrier to market recovery.

High asking prices were the #2 reason cited by investors and brokers; owners considered this less of an issue. Uncertainty about future cash flows remains a significant factor.

“Lack of access to debt financing” is misleading, when it comes to multifamily purchases. Fannie Mae and Freddie Mac are making debt financing available. The caveat is that they are not making enough financing available. If borrowers can only borrow 50 to 65% LTV because of bank rules on debt service coverage ratios, investors necessarily demand higher cap rates and cash-on-cash returns. Owners who are not underwater and have positive cash flow think they have little incentive to sell in this market. (Most fail to entertain the idea of swapping out for a distressed property, or different asset, with a higher cap rate, or higher cash-on-cash return.) Owners who are motivated by one of the Ds – debt, divorce, dissolution of partnership, death, development project – still look back to prices from 2007. In the alternative, they simply do not have enough comparable sales to review. This is because the banks are not lending enough money to motivated buyers. And the circle repeats.

That leaves the buyers who do have significant pools of cash to demand “fire sale” prices. Those few “fire sales” taking place typically require significant maintenance and repair. Word of the prices of the fire sales –but not the hassles attached — are spreading like, well, wildfire. This, in turn, keeps the cash-flush buyers on the sidelines, but with demands in check. Once a significant buyer surfaces in a given market, and starts pulling the trigger on large purchases, things will change: Many of these otherwise restrained buyers on the sidelines, and the banks, will lose their self-control. Another feeding frenzy will then ensue.

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