Commercial Grade is a weekly post by John Cicero, MAI who provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. This week, after a winter slumber, John looks at client traffic patterns and explains why sharing information is not a one way street.

Disclosure: John is a partner of mine in our commercial advisory firm Miller Cicero, LLC and he is, on Wednesdays on Thursdays, one of the smartest guys I know. …Jonathan Miller

Being just an appraiser, I always appreciate someone who can take a complex subject like economics and explain it in a way that I understand. I was fortunate to have recently been at a joint seminar offered of the Appraisal Institute and the Royal Institute of Chartered Surveyors (RICS). The keynote luncheon speaker was an economist named James Grant, Founder and Editor of Grant’s Interest Rate Observer, who was speaking on the current state of affairs in the subprime lending market.

As a commercial appraiser, I’ve been reading about the rising default rates in subprime mortgages with one eyethat’s a problem for the residential guys! However, Mr. Grant explains that in the capital marketsthe shin bone’s connected to the knee bone, and the knee bone’s connected to the thigh bone! The light bulb went off (thanks, Jim)the fallout in residential subprime mortgages are just the tip of the iceberg and although they may be affecting our residential brethren first, it is inevitable that it is just a matter of time before tighter credit ripples through the capital markets to affect us commercial guys as well.

I can’t help but feel that this is the calm before the storm. The wheels have already been set in motion and credit is starting to tighten. While I have not personally seen the effects of this yet in my practice, the thigh bone is connected to..something( the hip bone?)

One Comment

  1. W. Thomas Duran April 14, 2007 at 3:39 pm

    As a former graduate student of John Cicero, MAI at NYU’s M.S. Real Estate Program I can attest to importance of understanding the economic “obsolescence” that may effect the valuation of commercial real estate. The is a good article published by CBRE Torto Wheaton Reasearch by Gleb Nechayev, a senior economist dealing with the “Spill Over” effect whereby the default of subprime mortgages may potentially cause two paths effecting commercial real estate. One path states that default will lead to a reduction in borrower wealth, consumer spending, reduced commercial demand, causing higher vacancy, lower rents, and lower commercial property prices. Likewise a second path the capital markets side defaults will cause tighter credit restrictions, wider margin spreads with mortgages, fewer bids to purchase, higher cap rates, and lower commercial property prices. As my former professor has stated beforethe shin bone’s connected to the knee bone, and the knee bone’s connected to the thigh bone!

    W. Thomas Duran, MSRE ’07
    NYU Michael F.X. Waters Scholar

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