Over the past few months the U.S. debt markets have been extremely volatile. We are all aware of the “Sub-Prime” mortgage debacle that has taken our country’s headlines by storm as it pertains to the residential housing market, but many are unaware of what affect that this crisis has played in the commercial real estate market.

For clarification, the commercial real estate market is extremely strong at this point and runs an entirely different cycle as residential real estate. Many investors believe the phrase “Real Estate Bubble” refers to real estate in general, when in most cases the so called “bubble” pertains primarily to the U.S. housing market. It is important to realize the differences between both sectors and what the driving factors are that differentiate them. In fact, a recent Wall Street Journal article states that “The national office market, which cratered after the tech bust in 2000, has recovered and is the strongest it has been in five years.”

Though the commercial fundamentals still remain positive, the commercial lending market, more specifically commercial mortgage back securities (“CMBS”), have recently experienced some rough waters. CMBS’s are commercial mortgages that are packaged upon origination and sold to investors on Wall Street. The recent instability of the residential markets and sub-prime concerns has positioned many commercial lenders to “tighten their reigns” on the commercial side. Many of these lenders have some sub-prime residential exposure and are increasing their spreads (what they charge for loans), some up to 200 basis points to hedge their risk. These lenders are also doing away with some other benefits that many investors have grown to enjoy, such as higher loan to value ratios and interest only financing. In turn, these factors ultimately affect the yields paid to the investors because the borrowing costs have increased. To improve these issues, sellers will have to lower pricing expectations which will ultimately lead to the reversal of the cap rate compression era that we have seen in recent years. Only time will tell what is in store for the future U.S. real estate marketplace. Many sectors like Medical Office and Multi-Family remain extremely optimistic.

Grant Conness, Director 1031 Alternatives Group was recently quoted in The Wall Street Journal in an article titled “Land Boom to Skirt Credit Woes?” The article discusses the benefits and increased popularity of using the Tenant In Common (TIC) structure to purchase raw land in a credit tightening environment.

Though land investments generally do not produce the current income streams that most 1031 Exchange – TIC investors are seeking, they might be a good play “for a younger investor with a longer-term horizon”, as Grant Conness mentions in the article. It may also be a unique opportunity for investors seeking asset class diversification or those in the quest of, “all cash” or no leverage deals.

For the investors that may be turned away from land TICs because they lack current income, some sponsors have taken an approach to set up these land TICs with option payments which provide current returns. The sponsor may in turn purchase the property at certain strike prices in future years. This strategy may now provide land investors not only the opportunity of capital appreciation but also the current income that most land investments lack.

Some home builders and developers are at a point where they are looking to get out of certain projects that were put together late in the housing boom. This may be an opportune time for TIC investors to receive some attractive pricing in terms of land costs with the expectations that 5-10 years down the road the housing slump recovers and these land owners may liquidate their holdings for a significant capital gain.

Please click here to view the Wall Street Journal article “Land Boom to Skirt Credit Woes?” in its entirety.