Neither a Borrower Nor a Lender Be — Be an Investor

Posted on Mar 24 2010 - 9:01am by Holly Robinson

Foreshadowing the current commercial real estate foreclosure crisis by several centuries, Polonius advised in Shakespeare’s Hamlet: “Neither a borrower nor a lender be.” He might as well have added, “Be an investor instead.” Polonius’ words put most of the analysis of commercial real estate industry experts, reflecting on the state of the industry in major newspapers all over the country this weekend, into a nutshell. 

According to a congressional oversight panel convened last month to oversee the dispersal of federal money being used to bail out the banking industry, about $1.4 trillion in commercial real estate mortgages will mature in the next five years, and half of those mortgages are “underwater,” meaning that borrowers owe more money than their properties are worth. Analysts differ as to how the economy as a whole will be affected by the maturation of “underwater” loans, and how the self storage industry as a whole may be affected. In general, though, Polonius’ words ring true — it’s not a good time to be a lender, and it’s certainly not a good time to be a borrower whose loan is maturing rapidly. Investors, though, may have a field day, viewing the situation as not so much crisis but opportunity.

For example, Dan Neyer, a Cincinnati investor, told the Cincinnati Enquirer yesterday that he planned to invest $40 million in commercial real estate over the next two years. He has invested $14 million in the Cincinnati area just since October. “I love this time,” says Neyer. “If you’re positioned and willing to take some risks, the values today are much better than they have to be.”

Some regional differences are also emerging. In some areas, self storage companies, like other small businesses, are struggling — especially in Marietta, Georgia, and Kapolei, Hawaii, where self storage facilities are facing the possibility of foreclosure this month. In other areas, though, investors are still buying self storage and the industry is thriving. For example, last week new self storage businesses were opened in Charlotte, North Carolina (Morningstar Mini-Storage) and in Charleston, South Carolina (Extra Space Storage). It is thought that in general, the commercial real estate mortgage crisis might affect self storage in the following ways:

  • It may be harder to procure financing for new facilities and/or new construction. Banks are examining potential loans much more rigorously than they used to. They are checking balance sheets to make sure that the numbers reported there are plausible. They are also giving more weight to a borrower’s liquid assets, and checking the historic performance of self storage facilities. 
  • Banks are becoming more reluctant to let borrowers pull equity out of a property in the form of added debt. This makes it a little harder to capitalize new projects. 
  • Some self storage facilities (and other commercial real estate enterprises) are reducing their rents in order to avoid vacancies. 
  • Some self storage facilities may have to renegotiate the terms of their loans, or refinance early in order to avoid a problem when their current loans mature.
  • Some investors, however, make take advantage of the opportunity to buy new property at lower prices and to borrow money at lower interest rates. 

Neal Gussis, writing rather presciently in Inside Self-Storage last January, agreed. “Even in the economic downturn, self storage has again proven to be one of the best real estate investments available and one of the most recession-resistant,” he said. 

Sources used:
Braverman, Laura. “In foreclosure crisis lies opportunity: prices, rents down far from market peak.” Cincinnati Enquirer. March 14, 2010. 
“Foreclosure of commercial properties rises in metro Atlanta.” Inside Self-Storage. March 15, 2010. 
Goldreich, Sonny. “Commercial real estate: distressed sales fears overblown, says expert.” The Gazette. March 12, 2010. 
Gores, Paul. “Commercial real estate loans worry some in bank industry.” Milwaukee Journal Sentinel. March 13, 2010. 
Grantham, Russell and Perry, John. “Commercial loan losses a rising storm: wave of foreclosures would hammer banks.” Atlanta Journal Constitution. March 14, 2010. 
Gussis, Neal. “How will self-storage owners survive the credit crisis?” Inside Self-Storage. Jan. 25, 2009. 
Haynes, V. Dion. “In DC, more evidence that commercial real estate headed for foreclosure crisis.” Washington Post. Feb. 19, 2010. 
Lynem, Julie. “Commercial real estate in SLO county: great time for tenants.” The San Luis Obispo Tribune. March 13, 2010.
Natarajan, Prabha. “Commercial real estate owners beginning to walk away from properties.” Wall Street Journal. March 10, 2010.  
Schlesinger, Jill. “The coming foreclosure and commercial real estate storms.” CBS News. Feb. 11, 2010. 
“Self-storage owner faces $10M foreclosure.” Pacific Business News. March 5, 2010.