Government Impact on Commercial Real Estate

Commercial real estate, on a national level, has experienced a significant resurgence. Despite its untimely demise following the recent recession, it is now experiencing significant gains in both sales and development. Furthermore, with the wake of the housing sector decline settling, financing for commercial real estate projects has become increasingly easier to find. However, analysts believe the recent shutdown may impede the recovery of this particular sector. Some even fear that commercial real estate trends may be curbed as a result of the mess in Washington.

“There is a lot of momentum in commercial real estate,” said Sam Chandan of Chandan Economics. “The banks are re-engaged. In the second quarter of this year, we saw a net increase in lending on construction projects for the first time since the financial crisis.”

As 2013 continues to draw to an end, commercial real estate sales are expected to surpass $300 billion. According to Chandan, projected sales within the commercial real estate industry represent an increase of nearly 380 percent from their low in 2009. However, the recent government shutdown may cause analysts to temper expectations.

Of particular concern is the impact the recent government shutdown may have on the resurgence of commercial real estate. Government inactivity has already resulted in higher interest rates, causing some analysts to acknowledge a potential stall in the commercial real estate industry. Imagine what would happen in the reverse if a debt default caused a spike in interest rates.

“Commercial real estate is very interest rate sensitive and credit dependent and long term. Those are not good formulas if you have a high interest rate environment or an environment in which credit is volatile,” said Stephen Renna, president of the Commercial Real Estate Finance Council.

Adding further concern to the state of the commercial real estate sector is its dependence of leverage. Commercial real estate typically requires servicer intervention, as big banks and investors in commercial-backed securities are relied on for funding.

“About 50 percent of all commercial real estate lending is bank driven, so if banks have less capital, and are losing capital, they are in a position where they are going to be preserving their capital instead of putting their capital out there in the form of a commercial real estate loan,” added Renna.