On the Money:
10 Implications of the Credit Crunch Revisited

A year ago, as the credit crunch began to settle in, chilling markets worldwide, we went out on a limb and offered “10 Implications” for commercial real estate investment and finance. For the most part, we were right on the money; if anything, the repercussions have been deeper and the challenge has lasted longer than we thought. Here is a reprise of what we said would happen, what actually has happened and most importantly, further implications as the credit crunch enters its second year.

Sales volume will drop until a new price level is achieved and friction between sellers and buyers eases.

2007 Implication: Falling volume will result in less 1031 demand. Demand for 1031 properties will also soften as the gains on sales drop and more capital is reinvested into alternate asset classes.

2008 Update: Property sales continue to fall with volume through August, off 75% compared to the same period in 2007. Buyers and sellers have yet to settle on a new price level and the gap between bid and offer prices remains wide, roughly 15% by many estimates. Any falloff in 1031 demand has been largely overshadowed by the overall plummet in sales. Equity capital does not appear to be shifting into other asset classes as commercial property remains among the “least worst” of the alternatives. In fact, fresh capital is being raised and is awaiting the right conditions for re-entry into real estate.

Forward Implications: Continued volatility in the financial markets coupled with even greater economic uncertainties keep buyers and sellers apart. As time wears on, sellers will become more highly motivated and more distressed situations will emerge. Buyers now have the advantage of time and the patience to wait for prices to fall. Patient or not, lack of financing keeps many buyers out of the market. With buyers still financially challenged and the level of distress among sellers rising, prices appear to be heading lower over the near term.