This PITFALL is more of an existing myth in the market place than an action or inaction on anyone’s part. A common theme among Real Estate Brokers, Mortgage Brokers, Salespersons and investors is the belief that commercial properties are more consistent, predictable, less volatile and generally safer than other types of Real Estate properties. This is based on the core assumption that the players in the transaction are more sophisticated due to the size of the transactions and the financial qualifications.
In recent history; the S&L crisis of the late 1980’s early 1990’s and the unfolding commercial collapse of the late 2000’s is clear proof that this irrational belief of a greater financial stability in commercial Real Estate is largely unfounded. Indeed, commercial exposure is a major contributing factor in the collapse of hundreds of regional banks nationwide.
Commercial is just as susceptible to all market conditions as any other subset of this asset class. The main difference is that the transactions can be larger (more principle at risk) and more complicated (as more sophisticated borrowers may default strategically), which can be more difficult to control and unwind when they go bad.
For the individual investor the reality is that the time it takes to start, build, market and cash flow the commercial property to profitability is a longer time to the exit strategy than many other property types. This longer time horizon increases the risk to the individual investor’s capital and return on investment.
Analyze Commercial Real Estate as an investor would any project with the additional considerations for the size of the potential loss and the sophistication of the investors to involve legal representation into the investor’s analysis.