Since institutional investing has become a more dominant component of the commercial real estate market, and because of securitization, investors are more and more separated from the decisions concerning specific real estate acquisitions, due diligence is even more important.  The function of due diligence is to identify, ascertain and model a property's risks.  This is the Art and Reason for Due Diligence.

Today’s problems in the credit markets and the slowing economy are catching up with commercial real estate.  The Savings and Loan failure in the late 80’s was caused by the lack of property and environmental standard assessments.  In the early 90’s new standards that were designed to protect commercial real estate investment based on the knowledge and experience gained then.  In the age of real estate globalization how should our due diligence methods and deliverables evolve to meet the needs of the 21st century commercial real estate investor?...

Twenty years ago over capitalization of the commercial real estate sector lead to the national economy into a recession.  In 2009 the commercial real estate failures are a result of again the over capitalization of the real estate market, but commercial real estate was not the cause of the flood of money this time but as a result of the banking industries insatiable appetite to place loans  real estate fundamentals gave way to easy money.

What we have learned comparing the differences from twenty years ago is good standards have held up the commercial real estate market surprisingly well, considering the depth of the current credit crisis, but only to a point.   Unlike twenty years ago commercial real estate due diligence process did protect the investor from the misrepresentation of the physical condition of the building, and the multitudes of intangibles that have to be taken into account when evaluating a commercial property for acquisition.  But today's investors are at risk and the current risk models in use have not proven to be accurate enough.

Performing Commercial Real Estate Due Diligence it is easy to overlook the many details that come into play.  In a reveling survey asking institutional investors to rank 68 elements of risk in degree of importance environmental concerns where considered the item that posed the greatest unknown risk in derailing a project.  While looking over the lists top ten you can see the elements of greatest concerns grew out of the failures twenty  years ago which caused the over valuation of property assets.

Ranking the relative importance of Due Diligence Factors:
1    Environmental reports
2    Pre-leasing requirement
3    Status of borrower’s / developer’s financial obligations Borrower/ developer on other projects
4    Tenant quality
5    Quality and comprehensiveness of information provided by borrower/ developer / seller
6    Review of borrower’s / developer’s financial statement
7    Vacancy rates and trends in the market
8    Evaluation of borrower’s / developer’s capability, substance and track record
9    Tenant improvements and requirements
10    Soils and Engineering reports

The lowest emphasis in the survey was placed on economic factors:
67    National/global real estate markets
68    Inflation

The question of assessing the general priority and emphasis of institutional investors has a greater emphasis on property specific analyses as contrasted to borrower/developer and market conditions. Today the commercial real estate problems are more related to the economic market and borrower/developer difficulties than they were to undisclosed property defects leading to over valuations.

The convergence of a global economy required a serious re-examination of many investment paradigms and mythologies, to develop a more accurate understanding of the complexity of the international commercial real estate market.  Institutional investors’ due diligence emphases needs to revaluate the importance of the effect of global economic and credit conditions, as well as the owners reserves against debt, as a higher priority in future due diligence modeling to ascertain the effects of the one common element of risk commercial real estate experienced in 1987 and in 2007; over capitalization.