Tenant In Common (TIC) Sponsors Face Adversity as the Volatility of US Debt Markets Rattle the Real Estate Industry

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.