Economy: The Painful Process Of De-Leveraging – Survive To Deal Again
- Mar 02, 2009
As we know now, too much debt in many sectors of our economy resulted in a very fragile economic system; we’re paying the price for this now. The process of reducing the debt level is painful for everyone. The levels of debt were high for virtually all assets and businesses in this country. From consumer credit to Investment Bankers and everything in between, too many loans at too high levels. All based on the premise that value only goes one way, up.
Well as the saying goes what goes up… Commercial real estate unfortunately will not be immune to this process. Our outstanding commercial real estate mortgage debt in the United States now tops $3.4 billion. Impossible to say what the debt level will look like when we reach a stabilized point where new transactions and lending begin again; but safe to say we are talking about hundreds of millions of dollars of debt reduction.
The resizing process won’t happen overnight. How do we reduce the amount of debt in commercial real estate? Basically one of two general ways, 1) voluntarily through a refinance, work out or sale process as more cash equity is contributed by existing or new owners and new debt is created or re-set, or 2) through the foreclosure process. In both cases a new breed of asset manager/advisor will emerge, working with owners to attempt to find a level of debt that is sustainable. Expect closing dinners to suffer, as closings will not be cause for celebration in many instances.
Unfortunately we will see foreclosures and distressed sales resulting in significant losses for owners and lenders. The positive, if there is one, is that a new opportunity will be presented for a new buyer. Those asset managers/advisors will be in high demand and will learn at a very fast rate as all types of issues are presented. If history repeats they will become the next generation of owners and developers. New wealth will be created as the process unwinds; don’t expect to have fun everyday and don’t expect this to turn overnight, but the process will evolve and sooner rather than later we will be on the other side of this cycle. The goal in the short term is survive.