Economic downturn combined with over building can cause increased vacancy in commercial real estate; which can cause a decrease in commercial real estate income and therefore value; that can cause borrower distress; which in turn can cause distress in the loan securing the commercial real estate; which will cause distress in the lender’s balance sheet; which can cause distress in a bank’s financial condition.
The distress can result in a foreclosure; which will result in a distressed sale; which further impacts real estate values; creating a vicious cycle that affects investors/property owners and real estate lenders. A significant concentration of this type of loan and real estate collateral can cause a lender enough regulatory and financial distress to cause a lender/institution to fail.
When these events combine often enough in a specific area, city, state or even region; the entire area, city, state or region can be affected causing a cataclysmic decline in real estate values. This decline not only affects the investor/property owner/borrower and lender/financial institutions that were in line to gain from the commercial real estate operation and appreciation had that been their collective goal but to everyone residing in those areas that were not in line to share those gains or losses.
Of course we have all been witness to the global financial meltdown of 2007-20?? that was a direct result of a national real estate and real estate mortgage bubble. Clearly investors in financial stocks, mortgages and real estate funds have lost billions. It has been estimated that $6.3 trillion dollars in residential equity has been lost since the 2007 decline in value began. I have not read a credible number for commercial real estate losses but one can certainly assume it will be a multi-trillion dollar figure.
In any event no one “forced” any of these investor/owners to buy real estate and by investing they assumed the risk of loss. Unfortunately there are many people who became affected by the fallout from this ongoing crisis that had not invested in real estate and real estate lending without the benefit of upside or the ability to evaluate the financial risk. Number one is the United States taxpayer.
Bondholders and other passive investors continue to lose, or are at risk of losing, billions of dollars, a story that has been well reported and can be heard or read about daily. One group that does not receive a lot of press coverage that has lost as much as any other industry or maybe more percentage wise and continues to lose is the real estate brokerage community. Both residential and commercial brokers have been equally affected. I cannot speak for residential brokers since I am not directly involved in that industry but I do feel qualified to speak on behalf of commercial real estate brokers and commercial real estate loan sale advisors.
The vast majority of real estate brokers have worked diligently both before the crisis began and as it continues to unfold to bring a valued added service to buyers and sellers in the acquisition and disposition of real estate and loans secured by real estate. Unfortunately, there are few sellers and buyers today that feel this is an opportune time to sell their property and as a result most real estate professionals are earning a fraction of the fee income they had enjoyed for decades.
The one segment of sellers in the market that “is” selling, or considering selling, is financial institutions. That’s the good news. The bad news is that because of the bulk of the product that these sellers control sales commissions have been, and are continuing to be, compressed. The lure of multiple listings from banks and special servicers combined with the lack of other opportunities has caused brokers to drastically cut their fees. This cut could not come at a worse time since these mega sellers not only expect a discounted commission they also expect more services such as free broker price opinions as well as the ability for the broker/advisor to offer services such as electronic bidding, underwriting and multi product marketing services such as short sale negotiation, bulk REO sales and whole loan sales.
To compound the problem of discounted fees many of these lender/sellers have no intention of selling at a significant discount in order to facilitate a quick sale and in fact may not be a realistic seller at all and are just listing the properties or loans to appease the banking regulators.
I have been involved in numerous competitive listing situations where the advisor told the lender/seller whatever they wanted to hear regarding a higher than market valuation in order to secure a listing in hope that the lender/seller will lower their price expectation once they see what value the market actually brings. Unfortunately this is seldom the result.
In some cases broker/advisors bring this downward pressure on themselves by unnecessarily cutting fees by either not believing that they truly bring a value add or by sheer desperation. In other cases I believe lenders and servicers are acting predatorily taking advantage of the distressed market and trying to offset their losses onto the brokerage community.
We have seen a massive and continued consolidation in the banking and lending industry. I believe we will see a similar consolidation in the commercial real estate brokerage and loan sale industry. I hope that brokers and advisors will see this disturbing fee reduction trend as unnecessary and unprofessional and I hope that competent brokers and advisors will believe in their valuable services and remember that a lender/seller’s losses have nothing to do with the broker/advisor’s services and they have the right and obligation to hold firm on their fees and earnings.
I spend a lot of time studying and writing about distressed loans and distressed lending. Even though I make my living from sales commissions I sometimes forget about the plight of the broker/advisor. I want to thank my son Matt who is a senior loan trader at Benewolf for encouraging me to write about this timely subject and hope that readers will share this post with other real estate professionals.
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