Wade Boggs, Steve Garvey and Pete Rose are in a bar. Boggs says, “I am going to ask her out.” Garvey replied, “You can’t do that, she’s carrying my baby.” To which Pete Rose added, “You wanna bet?
Unless you’re a “deal junkie” like me, you probably didn’t see the news that after nearly a decade in development, the 6.7 million-square-foot Surat Diamond Bourse building (SDB) was completed and opened. The SDB was built at a cost of $384 million and is now the world’s largest office building – nudging out the 6.5 million-square-foot Pentagon. Now there’s a listing we’d like to have! Sure hope they didn’t have to finance it at today’s rates!
Unless you’re a “deal junkie” like me, you probably didn’t see the news that after nearly a decade in development, the 6.7 million-square-foot Surat Diamond Bourse building (SDB) was completed and opened. The SDB was built at a cost of $384 million and is now the world’s largest office building – nudging out the 6.5 million-square-foot Pentagon. Now there’s a listing we’d like to have! Sure hope they didn’t have to finance it at today’s rates!
They say perception precedes reality. In the case of commercial real estate finance, the divergent opinions surrounding the health of capital have produced gossip, innuendo, rumors and fear.
“Doom loop,” “meltdown,” “downward spiral,” “debt bomb” and “banking crisis” are phrases that regularly appear in articles attached to underwater multifamily portfolios or summaries of heavily leveraged office towers whose rents can no longer service their debt. That, in turn, fosters the belief that the loans provided by banks and private lenders are unlikely to ever be paid back in full, thus putting the greater economy at risk.
The commercial real estate debt market is poised for a record-breaking event this year as $929 billion in loans are set to mature, with an additional $1 trillion anticipated to come due between 2025 and 2026. These maturities represent 42% of the sector’s total outstanding debt!
Last year’s extensions and loan term modifications helped mask early distress signals in certain property types. However, the significant uptick in loan maturities this year could lead to increased transaction volumes and higher default rates should borrowers encounter difficulties securing new financing.
Unlike residential housing, commercial real estate loans typically have terms ranging from a few years for bridge loans to loans with longer terms of up to 10 years for stabilized assets. At the end of these terms, including any extension periods, the full principal balance must be repaid. While loans are generally paid off at maturity under normal market conditions where sufficient credit is available, tighter credit conditions resulting from rising interest rates or market uncertainty have made securing new financing challenging.
The next three years could see lending conditions remain tight alongside an unprecedented volume of maturing loans. If this trend continues, it could lead to a situation similar to a game of musical chairs, where there aren’t enough financing options available when the music stops, when these loans come due.
San Diego’s unemployment rate climbed to 4.7% in January, according to the latest jobs report from the Bureau of Labor Statistics. This is the highest local unemployment since the fall of 2021. Unemployment is also the best indicator of commercial real estate (CRE) health.
The other CRE indicator is growth in population (more people moving in than moving out). Data released by the Census Bureau this month were a bit disconcerting. New estimates revealed nearly 31,000 people moved out of the county between July 2022 and July 2023 – almost double the previous year. With the exception of the first year of the pandemic, we haven’t seen that volume of people exiting for nearly three decades. The last time we saw this kind of exodus, we were mired in recession and the jobless rate reached nearly 8%.
Nick’s Numbers
The chart below illustrates what Don writes above about people leaving San Diego.
If you would like an analysis of your properties’ value or discuss what you should be doing with regard to interest rates or inflation and their impacts on your business, tenants, or property, I’d be happy to talk. (Nick Zech, 858-232-2100, nzech@cdccommerical.com).
Since the first of the year, we have had a number of interesting problems come our way, to which we have had equally creative solutions. Here’s a short summary. If you have a real estate problem, that’s where we excel.
The owner owns business and real estate but rent is way below market rate. Business can’t afford to pay the market rent. Close business? Sell business and real estate separately? Find buyer for business and real estate?
No trust/no will
$400K un-assumable loan on a $2.4 million property. Buyer with cash to loan? Seller carryback a second? Take over 1st and get new second.
Partnership owns property for over 25 years. Partners were all tenants but have or are vacating. Do you re-tenant (TI’s, commissions, etc.) or could it be torn down and redeveloped?
We are evaluating many properties for redevelopment, but it takes 12-24 months (in escrow) to receive the needed permits. Buyers won’t close without them or a major price reduction. Seller doesn’t want to carry for that amount of time.
Empty nester with lots of equity in estate home. Wants to downsize but not pay the capital gains tax (can only shelter $250K – $500K single or couple). We advised renting out the property (making it income property), move down (buy or rent) and do a 1031 exchange after the income property is “seasoned.”
I like to call a lot of these situations “trapped equity” or as my wife says, “property rich and cash poor.”
As we head into baseball season and election season, it would be good to remember the adages, “figures don’t lie but liars sure do figure” and “garbage in garbage out.” I recently read that the Oakland Athletics (soon to be the Las Vegas Athletics) were 32-0 in games in which they scored more runs than their opponents (who would have thunk?). In February 2022, Pew Research did a survey experiment. They asked respondents if they were licensed to operate a class SSGN (nuclear) submarine. In the survey, 12% of adults under 30 and 24% of Hispanics claimed this qualification. In reality, the share of Americans with this license is 0% (in fact it doesn’t even exist). So careful what you read or you’ll be out watching the submarine races! I hope you enjoy the story.
A father addressed the group; “I believe that when a child like Shay, who was mentally and physically disabled, comes into the world, an opportunity to realize true human nature presents itself and it comes in the way other people treat that child.”
Then he told the following story: Shay and I had walked past a park where some boys Shay knew were playing baseball. Shay asked, ‘Do you think they’ll let me play?’
I knew that most of the boys would not want someone like Shay on their team, but as a father I also understood that if my son were allowed to play, it would give him a much-needed sense of belonging and some confidence to be accepted by others in spite of his handicaps.
I approached one of the boys on the field and asked (not expecting much) if Shay could play. The boy looked around for guidance and said, ‘We’re losing by six runs and the game is in the eighth inning. I guess he can be on our team and we’ll try to put him in to bat in the ninth inning.’
Shay struggled over to the team’s bench and, with a broad smile, put on a team shirt. I watched with a small tear in my eye and warmth in my heart. The boys saw my joy at my son being accepted. In the bottom of the eighth inning, Shay’s team scored a few runs but was still behind by three. In the top of the ninth inning, Shay put on a glove and played in the right field. Even though no hits came his way, he was obviously ecstatic just to be in the game and on the field, grinning from ear to ear as I waved to him from the stands. In the bottom of the ninth inning, Shay’s team scored again.
Now, with two outs and the bases loaded, the potential winning run was on base and Shay was scheduled to be next at bat.
At this juncture, do they let Shay bat and give away their chance to win the game?
Surprisingly, Shay was given the bat. Everyone knew that a hit was all but impossible because Shay didn’t even know how to hold the bat properly, much less connect with the ball. However, as Shay stepped up to the plate, the pitcher, recognizing that the other team was putting winning aside for this moment in Shay’s life, moved in a few steps to lob the ball in softly so Shay could at least make contact.
The first pitch came and Shay swung clumsily and missed. The pitcher again took a few steps forward to toss the ball softly towards Shay. As the pitch came in, Shay swung at the ball and hit a slow ground ball right back to the pitcher. The game would now be over. The pitcher picked up the soft grounder and could have easily thrown the ball to the first baseman. Shay would have been out and that would have been the end of the game. Instead, the pitcher threw the ball right over the first baseman’s head, out of reach of all teammates.
Everyone from the stands and both teams started yelling, ‘Shay, run to first! Run to first!’ Never in his life had Shay ever run that far, but he made it to first base.
He scampered down the baseline, wide-eyed and startled. Everyone yelled, ‘Run to second, run to second!’ Catching his breath, Shay awkwardly ran towards second, gleaming and struggling to make it to the base.
By the time Shay rounded towards second base, the right fielder had the ball. The smallest guy on their team who now had his first chance to be the hero for his team.
He could have thrown the ball to the second-baseman for the tag, but he understood the pitcher’s intentions so he too, intentionally threw the ball high and far over the third-baseman’s head. Shay ran toward third base deliriously as the runners ahead of him circled the bases toward home.
All were screaming, ‘Shay, Shay, Shay, all the way Shay’ Shay reached third base because the opposing shortstop ran to help him by turning him in the direction of third base, and shouted, ‘Run to third! Shay, run to third!’ As Shay rounded third, the boys from both teams, and the spectators, were on their feet screaming, ‘Shay, run home! Run home!’ Shay ran to home, stepped on the plate, and was cheered as the hero who hit the grand slam and won the game for his team. ‘That day,’ said the father softly with tears now rolling down his face, ‘the boys from both teams helped bring a piece of true love and humanity into this world.’
Shay didn’t make it to another summer. He died that winter, having never forgotten being the hero and making me so happy, and coming home and seeing his mother tearfully embrace her little hero of the day!
Monthly Letter Signup
Enter your information above to be added to our Monthly Letter email list.
