Investors wise to be wary of 'generational opportunities' in real estate market

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Investors wise to be wary of 'generational opportunities' in real estate market

12:00 AM CST on Friday, November 20, 2009

Back in the late-1980s real estate crash, a steely-eyed local banker boasted that he would foreclose on as much property as he could. He planned to gobble up the distressed real estate, then make a killing selling the stuff when the market came back in a year or so.

Turned out this banker's eyes were bigger than his stomach for bad real estate deals. And the rebound he was counting on was a long time coming.

Eventually, the weight of all those failed real estate deals caused the financier's institution – along with most other Texas banks – to collapse.

The regional banking sector meltdown in the late 1980s and early 1990s pushed real estate values even lower.

That's why I wince when I hear analysts and investors licking their chops about all the killer real estate buys they are going to get in today's market morass.

Every good deal for an investor is a disaster for the previous owner and the lender who financed that project.

Opportunities, busts

Real estate industry players are already bragging about the "generational opportunities" that are going to be available courtesy of the current commercial real estate market shakeout.

Property values – if you could find any that have sold for a comparison – are down almost 40 percent from their peak a few years ago. That's on par with some of the nationwide declines we've seen in the worst of this industry's previous busts.

Of course, things were even worse than that in Texas back in the '80s. Thank the Lord we aren't the poster boy for failed real estate this time around.

But that doesn't necessarily mean that the property investment market here will rebound quickly or dramatically.

Most commercial real execs predict that their business won't come back until 2011 or later. And it could be risky to make a new play before the last hand has been dealt in the old game.

"Early is the new wrong," a recent market forecast warns.

The majority of industry members surveyed expect further property declines in the months ahead.

'Slow-motion train wreck'

One economist said the commercial sector shakeout will be more like "a slow-motion train wreck than the massive explosion felt when the residential mortgage market blew up."

Investors and brokers expect that the apartment market will have the best prospects in 2010, according to the annual Emerging Trends in Real Estate survey. The worst marks went to the retail and hotel sectors.

But until the lending windows open again and reasonable debt is available, is it fair to say any commercial property sector is a safe bet?

Before than happens, lenders have to deal with the billions of dollars in dodgy loans made a few years ago.

Right now, many are taking the approach of "pretend and extend" and hoping for better days in the economy.

Now the issue is whether commercial mortgage holders will all shift gears at once and decide it's time to foreclose their way out of problem deals.

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