So check it. I've been going through the motions of buying a commercial building, off and on, since 2017 or so. It's a bugshit process. Make no mistake, it's stupid, it's everything that's wrong with capitalism, and all if it is fucking horrible. To wit:
- You're going to pay prime plus two, prime plus three. If prime is 2.27%, your commercial loan is going to be 5.27%.
- Your term and amortization aren't the same. You buy a house? You amortize the loan over 30 years and pay it off over 30 years. You buy a dentist's office? you amortize the loan over 30 years and pay it off over 5. Maybe 8. Rarely 10.
- Which means obviously you will never pay it off. Which is okay because what you're going to do is sell it and buy another. Because of the carried interest rule you don't pay taxes that way. Capitalism!
Prime ain't 2.27 anymore, tho. It's 8.25, mutherfucker.
Let's play a game. You bought a million dollar dentist's office in August 2015 when prime was 3.5. You put down $300k and have been paying $4k a month.
You've paid around $300k. You owe $600k. The building is maybe worth $1.4, $1.5 and you've got $400k in equity in the place.
And no one is buying.
So okay. Let's re-up. You owe $600k. Nothing changes, except now you're paying $5700 a month for the same damn building. Your mortgage fees just went up 30%. How much of a cushion do you have, by the way?
- Fitch Ratings recently estimated that 35% of pooled securitized commercial mortgages coming due between April and December 2023 won’t be able to refinance based on current interest rates and the properties’ incomes and values. While many malls and hotels face high default risks, the situation is particularly dire for office owners.
Xiaojing Li, managing director at data company CoStar’s risk analytics team, estimates that as much as 83% of outstanding securitized office loans won’t be able to refinance if interest rates stay at current levels.
Gonna show you a picture. Comes from here.
$22.9 trillion minus $20.7 trillion is $2.2 trillion.
- Nearly $1.5 trillion in commercial mortgages are coming due over the next three years, according to data provider Trepp.