It’s a decidedly different set of circumstances today, Acton said. “That’s not the case today,” he said, but warned “it could turn into that at some point.”
For now, however, the two financial crises are quite different. “Even in the office sector where vacancies are rising and tenants are changing how they use space and all that, it hasn’t really shown up yet in net operating income for office buildings. It hasn’t shown up yet, mainly because the leases are so long. People are still under these obligations to pay the leases. Even if they’re not using the space as much, they still have to pay the rent. So, it’s not an operating problem.”
It’s a matter of maturity
What’s occurring today? “For the most part in commercial property. It’s really a loan maturity problem first and foremost – if you have a property and the loan’s coming due today,” Acton said. “Typically, with real estate, I’d go as far to say most debt in America never gets paid off. It just gets renewed; it rolls over to a new loan.”
He offered a hypothetical example to illustrate: “So you have a building today, the loan’s coming due. You have a problem, and your lender has a problem as well. One, the interest on that loan is going to be much higher – it’s probably going to be twice as much from when it was originated, depending on when it was originated. And more importantly, the values may or may not still be the same.
“So, in the case of a typical office building where the loan’s maturing, the value is probably below to where it was when the loan was originated. Maybe that loan was five years ago, very typical. So the value’s down.”
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