A few experts said it was going to happen, and all sorts of people preferred to just pretend it wouldn’t or couldn’t while commercial property owners desperately tried to modify, extend and amend their amassed debts with lower and lower property values to work with. However, that time has come: Commercial real estate owners are walking away.
The Wall Street Journal reported March 10, 2010, that the latest commercial property owner to take this plunge is Vornado Realty Trust (VNO), a 13 billion real estate investment trust. The group warned last week that it would “walk away” from 235 million dollars in loans.
The Journal predicts that the trend will escalate in the coming months as commercial mortgages undergo the same painful correction that the housing market has been going through. However, it may ultimately be even “easier” to step back when it comes to commercial loans, according to the expert from Dow Jones Newswires, because commercial loans are non-recourse in many cases and there is no direct obligation or claim on the owner’s assets.
Add to this the fact that there is a decreasing level of stigma attached to this kind of default. For a while, investors boycotted companies that took this route out, but at this point, that trend appears to be ineffective and fading. After all, when these loans mature and can no longer be kept afloat by Federal Reserve engineering, what else can they do? Refi’s don’t work anymore thanks to newer, lower valuations on properties, and companies are simply unable to make up the shortfalls thanks to higher delinquency rates and lower property values and rents.
As usual, this story has two sides. This “walking away” is not a good trend for our society to start accepting as “without stigma.” Every time it happens, it gets a little easier to do again in many cases, and that is not good. However, as is always the case when real estate starts heading for rock bottom, there are a lot of opportunities out there in commercial real estate right now – if you can grab it and hold on.