Home > Uncategorized > What’s Happening with the Flow of Distressed Commercial Real Estate

What’s Happening with the Flow of Distressed Commercial Real Estate

September 27, 2011 Leave a comment Go to comments

The Aggie Real Estate Network held its annual business conference on July 29th. The conference was held here in College Station this year. Attendees got to hear a number of great speakers and panel discussions. One particularly interesting panel focused on the distressed commercial real estate market.

The panel was moderated by our Chief Economist, Mark Dotzour. Panelists included a representative from the Situs Group’s special servicing branch, an institutional real estate investor from Behringer Harvard and an opportunistic investor with Conti Real Estate Investments.

Dotzour focused on a few core issues such as the current level of deal flow, pricing and investor interest. Here is a brief synopsis of his questions and the panelists’ insights.

Distressed assets are mainly being offered by the FDIC, healthy banks needing to unload bad assets and commercial mortgage-backed securities (CMBS) special servicers. Is the flow of assets from these three groups increasing, decreasing or staying about the same?

• The flow of assets from the FDIC has slowed considerably in 2011. They were able to move more than 4,000 properties in 2010 through auctions and structured sales. However, the quality of the properties being offered is getting higher.

• Some healthy banks are out peddling portfolios of bad assets. Many are ready to move on. Portfolio size is smaller than in the past, but the deal flow is fairly steady.

• Only a small amount of product is actually coming to market on the CMBS side. They are modifying or extending about 70 percent of their current resolutions.

As far as loan extensions, the can has probably been kicked down the road several times for many commercial real estate loans since 2007. What are your thoughts about extend and pretend?

• In many cases, it has turned out to be the right thing to do for all parties. If a big chunk of those assets had been sold off back in 2009, it would have been a disaster.

• In 2008 and 2009, no one knew what was going to happen next. Some movement occurred in 2010, but people were still hesitant. Much more capital is available in the form of equity and debt in 2011, and that’s a good thing.

We hear a lot about the bifurcated market out there. Is it also bifurcated in the distressed asset market as well?

• There is strong demand and limited supply for institutional-grade distressed properties. Many are great properties, but they just have too much debt. On the other hand, there is not as much interest for the smaller FDIC properties today.

• There is also a difference in what assets become available by geography. We have the Texas recovery, and we have the national recovery. Texas is outperforming the rest of the country, and that has increased the demand for Texas properties. Local, national and international buyers are all interested in our state’s Class-A distressed properties. Competition is even picking up for Class-C properties compared to 2010.

• Class-C deals were getting done several years ago for 20 percent of the note value. That gap is closing today. You don’t see those deals anymore. The market has changed more in the last three months than in the previous two years.

I’m hearing that purchase prices are up to pre-crash levels in the Northeast. Has this premium for properties in the major gateway cities such as New York, Boston or Washington D.C. leaked over into the major Texas metros? Are our prices priced to perfection here in Texas, or are we not there yet?

• When you talk about the very best core assets, Houston, Dallas and Austin are there already. But you’ve got this division between the core and opportunistic properties at both ends of the spectrum where there is a lot of interest and the vast wasteland of properties in the middle that nobody is interested in at the moment.

• Some poorly performing assets have sold for more per square foot than a solid Class B asset. Purchasers are taking the risk that they can come in and do what current management couldn’t; lease the space up.

• CMBS assets that have actually been liquidated are experiencing losses in the 40 to 50 percent range. That’s also consistent with what losses are occurring in auctions as well.

• Early FDIC bulk transactions sold for 20 to 30 cents on the dollar. That price has gone up significantly since then. On single-property FDIC deals, we are seeing a wide range of prices.

So is now the time to sell trophy properties in Texas? Is there not a lot more upside potential there?

• I would have no regrets selling a property and booking profits today. You are seeing so much pent-up equity out there. I can’t figure where they are getting their numbers.

• The worst decision I made was not to sell an asset back in 2007 right as the market was changing. People are having trouble finding decent product. We might as well take advantage of it.

• Given the high level of uncertainty about future expectations, it makes sense to maximize returns now as opposed to stretching out your returns too far.

Reprinted from The Real Estate Center at Texas A & M    By Harold Hunt

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