The high demand for commercial real estate in California and throughout the U.S. has been due, at least in part, to interest from foreign investors and high rental incomes. Of course, the strength of commercial real estate depends upon the ability of buyers to obtain the financing they need to complete the transaction, and this is where problems might be lurking around just around the corner.
A prospective buyer of a shopping mall, warehouse or industrial property will usually go to large banks and insurance companies for financing. A third source of financing is commercial mortgage backed securities . Securities backed by commercial mortgages are bonds that are sold to investors and that usually have a 10-year maturity. At the end of 10 years, the debts have to be refinanced. The problem is that many of these securities are coming due in the next two years.
It is estimated that more than $400 billion of the bonds will mature this year as well as in 2017. Some observers anticipate that borrowers will have financial difficulties because they will not be able to refinance the debts that could amount to as much as $10 billion a month beginning within the next few months. The result could be an increase in commercial real estate foreclosure actions as CMBS purchasers elect to pursue higher rates of return on other forms of investments.
Unless banks and other lenders increase the money they will lend to owners of commercial real estate, the financial difficulties could increase. Owners of commercial properties could benefit from the advice of an attorney when seeking to refinance their obligations.