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A stick jammed in a bicycle wheel: Things comes to a screeching halt.

Wow, what an image. If you ever rode a bike as a kid you know exactly what this means. And yet the combined crash of the credit markets and now the stock market has done this to the real estate markets, both residential and commercial.

Talking with real estate agents the phrase I hear is “March can not come soon enough”.

On the commercial side, making money is much harder when developers have to come up with more cash to put into a deal or pay higher interest rates. These deals are not to provide shelter but to make money. If they can not make a profit, they will not get done. The stick in the bicycle wheel.

And on the residential side, it is a hard time to pull the trigger on a new home. Those buying in the upscale side have seen their portfolios beat up as the Dow has raced from 14,000 to 7,000 cutting net worth in half. It is hard to buy a luxury property in that situation. 

The psychology of the American public now is to hunker down, protect oneself, and not have any exposure. When that happens people are not real interested in buying and selling major items, like homes. Even the car guys are hurting, sales for November are down 28 percent from last year.

My advice to those in the real estate world. Keep moving forward, take any closing as a blessing right now, but concentrate on getting your business in a position to be successful when the times change.

Because they will. They always do.

(Oh, and a big thank you to James Temple at the San Francisco Chronicle for using the stick in the bicycle wheel analogy. It was dead on and the inspiration for the post.)

Industry professionals stress that there is capital out there and that lenders are willing to hand it out, if only because that’s how they make money. But in the wake of the international credit crunch that began in September, banks have tightened their standards and required a higher level of equity in any deal, whether it’s a sale, new development or debt servicing. Private equity investors always seek higher rates of return than the debt side, but are pushing up their terms higher still.

So effectively, a bigger than normal chunk of the overall financing is requiring larger than normal proceeds. That pushes down the recipients’ returns, often beyond the level where a deal is still profitable or at least worth the risk. The effective result is like a stick jammed in a bicycle wheel: Things comes to a screeching halt.  James Temple at the San Francisco Chronicle.

Related posts:

1. Real Estate Roundtable Sees Credit Issues Hurting Commercial Real Estate
2. Trillion Dollars of Commercial Real Estate Loans Coming Due?
3. Alert The Media - Banks Are Making Commercial Real Estate Loans
4. Commercial Real Estate Down 15% in 2008, Returns To 2005 levels
5. John Hancock Tower Sale Scares Commercial Real Estate Market