Here in Boise if you driven around town lately you can’t help but notice all the CRE vacancy. In some sub-markets here in the valley the vacancy rate has hit double digits. More and more property owners are finding it necessary to give rate and term concessions to their tenants and their long-term major tenants are even asking for help. Those tenants are at times struggling to still stay afloat, thus the major reason for the increased vacancy. The major problem with increased vacancy for property owners is reduced cash flow from the lack of rents. Property owners are in many cases going to their bank and asking for payment relief.
If a property owner can get relief from his or her bank then they can try to place new tenants in those spots and generate that needed cash flow. However, if the market continues to see weakness you’ll start to see a rise in banks finding it necessary to take over these commercial properties. This is harmful from two major standpoints. First, from the bank’s perspective. Bankers hate being landlords or owning any type of property. From a regulatory standpoint a non-performing CRE loan is about as bad as it gets. The bank will need to pursue a foreclosure or a deed in lieu. Afterwhile, they will sell the property to clean it off their books. However, just like the local residential real estate market the CRE market is down as well. Granted, it hasn’t seen the decline in values as the residential markets have, but none the less the bank is more than likely going to be taking a loss on that credit issued to the property owner.
Now for the silver lining; if you’re a business in need of more space its gotten a lot easier. If you’re a business that is looking to expand you may have a lot more leverage with landlords. Also, if you do see a major decline of commercial property value in the tune of 10 to 25 percent decline from today’s values it will truly be a buyers market. Time will tell what happens, but until then if you’re a property owner that is needing payment assistance from your lender, please know ahead of time that the bank is going to need to look out for its interests. So be prepared with a game plan you’d like to see implemented. If you need assistance with your game plan please contact me for helpful suggestions that you can take to the bank.