Another report by Reuters today states that commercial real estate prices dropped a record amount in the second quarter of 2009.  According to a study by the Massachusetts Institute of Technology Center for Real Estate, commercial real estate prices fell 18.1% in the second quarter, off nearly 39% from the markets peak in mid-2007.  Although the new for the most part seemed fairly pessimistic, there was a sign of hope.  The index measuring prices that current commercial property owners would be willing to sell their properties at fell a record 18.5%.  This may be an indication that the market is reaching its bottom.
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Whether or not this potential bottom is a silver lining for lenders is a different question.  If this actually is a bottom, what type of bottom is it?  Is it a V-shaped bottom which would mean a near term increase in property prices?  Or is it a U-shaped bottom which would mean that these highly depressed prices are here to stay for some time?  In the case of a U-shaped bottom, these depressed prices would basically prohibit any refinancing of commercial loans that were made between 2005 and 2007.  The price decline would be too great and the value of most of these properties would be far below the amount of principal owed on their loans.  Without the possibility of refinancing, the number of maturity defaults will increase dramatically leaving banks with the options of foreclosing, selling the note at a discount or negotiating for a loan modification.

Tags: commercial real estate, default, foreclosure