CRE market risk management is a real challenge. Many would-be commercial real estate developers who have outstanding creativity and savvy when it comes to finding new CRE development opportunities still fail to obtain equity capital financing and development loans. Their risk capital is lost. The market loses the opportunity. Jobs aren’t created and wealth creation suffers. Sophisticated analytics are used to calculate the loss exposure of the lender or investor, and if you come up on the wrong side of the analytics, sorry for your loss.
Sorry for everyone because it makes the deals that do obtain capital that much more expensive for the market, and the greater the expense the greater the risk. Sounds like a lose-lose proposition for everyone.
Doesn’t seem right, does it?
Market risk exposure in the CRE vertical is more acutely experienced than many other verticals because the properties take time to develop, then stabilize and then start generating earnings. In today’s Information Age, by the time they reach the point in time where they can start printing those distributions and dividends, a market disruption event could come along and change everything. Nobody likes this so we have these goofy analytics programs that predict who is going to lose money next by predicting who just lost money.
What about addressing the core problem that creates the losses and finding a way to make that lemon into lemonade?
The reality for most market disruptions is that they take at least 24 months to reach a point where they start causing existing business income-producing assets to start to suffer asset obsolescence. As these assets become comparatively more obsolete, their ability to generate income goes down and that spells big problems in the future. Yet if we harness that grace period and use it to re-position the business, re-develop the asset or make an orderly exit by selling the asset to someone who can re-position or re-develop it, then we can avoid at least some of these problems and make the decision to deploy capital on the next CRE development project that much easier for the underwriter to say yes to and support.