Commercial Real Estate 2010 Mid-Year Review
With half of 2010 behind us, it is a good time to examine what has transpired in commercial real estate during the first 6 months of the year. Historically, commercial has mirrored the performance of the residential market, albeit with a 12-18 month lag period. With that being the case, there had been some ominous predictions about what was likely to occur within the commercial real estate sector this year. At the beginning of 2010 the following major trends were stoking these predictions:
- Commercial loan defaults were at the highest level since the early 1990’s, particularly conduit loans.
- Vacancy rates for all property types were (and still are) at the highest level in approximately 15 years.
- Billions of dollars in loans came to maturity with limited credit available for refinancing as well as tougher underwriting criteria.
- Continued macroeconomic “headwinds:” high unemployment, anemic growth in GDP, and limited business expansion.
Given the foregoing, most market participants expected to see a significant amount of distressed and foreclosed commercial properties come to market. While there has, in fact, been an increase in the amount of distressed inventory over 2009, it is still not at the level expected.
Since the fundamentals of the market are comparable to the last commercial real estate bust of the late 1980’s/early 1990’s, it begs the question, “Why haven’t we seen the same amount or more distressed inventory?” In actual fact, it’s a little early in the cycle of the commercial real estate slump to say that there won’t be a major increase in distressed asset inventory. Nevertheless, there are several factors that have enabled banks to prolong foreclosing on troubled loans. In response to this, there has been a popular phrase in the industry that says banks are “extending and pretending.” That is to say they are extending loans which are maturing even when the property fundamentals do not support underwriting their current debt levels. Correspondingly, they are pretending (or hoping) that the fundamentals will improve during the extension period.
Banks have been able to take this approach due to enabling legislation passed by the Federal government. This includes some of the following:
- Relaxation in banks’ “mark to market” rules. This means if banks sell one type of real estate asset cheaply (below debt owed), they don’t have to mark down similar assets on their books, thereby minimizing damage to their capital ratios.
- An FDIC position paper issued in the fall of 2009 indicated to banks that if a loan was up for renewal, new appraisals were not essential and flexible loan terms should be granted to keep loans performing.
Resulting from these measures and others, according to the Wall Street Journal, there were $23.9 billion in loan restructurings at the end of the first quarter of this year. This was three times as many as a year earlier and two times as many as two years ago.
In summary, we offer the following observations and conclusions from what has transpired year-to-date and what is likely to occur over the next year.
- Significantly more distressed properties are likely to come to market.
- Given the significant amount of additional debt rolling over in the next few years and the slow economic recovery, banks can’t just keep extending loans.
- While more distressed inventory will come to market, it may never reach the level of the late 1980’s/early 1990’s because of relaxed government regulations and the possibility that even a mild economic recovery will help cushion the blow.
TD Sells Mountain View Park (“changes in attitudes, changes in latitudes”)
This 11 acre property was acquired by Good Earth Produce & Garden Center a few years ago with the intent of doing a premiere garden center serving southern Frederick County. The owner Dave Johannes has 2 other locations including Olney & Potomac. Not long after the purchase the county planning and zoning authorities changed the zoning on the site prohibiting a garden center. Electing not to fight the zoning change Mr. Johannes retained TD to market and sell the site. The site was quickly put under contract by a custom home builder. However, after tying up the site for several months, the buyer defaulted on the contract and TD recommenced with its marketing efforts. A few months thereafter, TD secured a congregation of the Jehovah Witness Church to purchase the property. The sale settled in May of this year after site plan approval was secured. Patience on behalf of the seller combined with creative marketing efforts by TD enabled us to secure full value for the property in a challenging market. TD thanks Good Earth Produce for the opportunity to handle the listing and sale of the property.
TD Represents BS Environmental in Buying Corporate Headquarters
B.S. Environmental Inc. (BSE) is a Native American owned and operated environmental engineering, management, and consulting firm headquartered in Maryland, with regional offices in Minnesota, Washington, New Jersey, Ohio and Florida. Juan Boston, President, retained TD to locate a suitable location to move its MD office. After a thorough and lengthy search the company settled on the purchase of 16 acres of land within northwestern Carroll County. TD thanks BS Environmental for the opportunity to work on behalf of its company.
TD Represents SafetyTech in relocating and leasing an office/warehouse building for its Maryland headquarters:
TD was retained by SafetyTech International, Inc to represent the company in its search for a new
Maryland Headquarters. (STI) is the World Leader in the design, development and manufacture of Powered Air Purifying Respirators (PAPR) for Chemical, Biological, Radiological and Nuclear (CBRN) Protection. SafetyTech PAPRs and Respiratory Filter Products are manufactured in the USA at their Maryland facilities.
After reviewing various alternatives presented by TD, the company leased 10,000 s.f. from Merritt Properties in Hagerstown MD.
Tyler-Donegan Residential continues its expansion
Headed up by partner Sean Brink, TD Residential continues its expansion having sold 50+ residential properties year to date, along with adding some veteran sales associates. While the residential team provides listing and buyer representation to traditional sellers and buyers, the company has also carved out a niche with some regional and local lenders in marketing distressed properties. Many of the distressed properties have been good investment opportunities particularly now that the market has stabilized. For information regarding these properties or our residential division you can contact Sean Brink at: Sean@tylerco.com or by phone (301) 748-4675.