Is the Other Shoe beginning to drop?
October 29, 2009
Much has been written about the upcoming demise of the commercial market, the so-called other “shoe” of real estate. Back in August I wrote an article for the blog entitled “Distressed Commercial Real Estate by the Numbers”. In it I quoted George Ratiu, a NAR economist. According to Mr. Ratiu, as of June of this year, the amount of commercial real estate in “distress” (defined as foreclosed, REO, or delinquent properties) had risen to $108 billion, a 107% increase in six months. Of that amount, the retail sector led the pack at around $17.8 billion with hotels coming in second at $11.8 billion.
In a more recent article published by KPMG it is estimated that, in the U.S, around $2.2 trillion of commercial properties bought or refinanced since 2004 are now worth less than the original price. According to the article, as of July 2009 around $124 billion of commercial properties have fallen into default, foreclosure or bankruptcy since prices started falling and fewer than 10 percent have resolved their financing issues. In the US, the banking industry is facing losses of around $200 – $230 billion on commercial property loans.
According to an article published in Florida Trend magazine, Florida banks have $56 billion in commercial loans or 34% of bank assets. Severely distressed loans (as a percentage of assets) are 15 times what they were in 2006 and at the end of the 2nd quarter, those banks had $5.1 billion in commercial, apartment and construction and land development loan in default, up from $274 million in 2006.
According to the article, Orlando has a17.4% office vacancy rate and Palm Beach and Jacksonville have some of the highest office vacancy rates in the country at 22.5% and19.9%, respectively.
Here in Lee County a number of high profile foreclosure proceedings have finally started against commercial developers/investors. Today, the Fort Myers News Press reported that an apartment complex which sold for record-breaking $79.6 million is now in foreclosure. The complex was bought as a condo conversion project in March 2006 and never moved forward. In this case, the foreclosure was initiated by the LLC which acquired the note from the FDIC after it declared Corus Bank, the original lender, insolvent September 11th of this year. In another instance, BankUnited filed a $6.8 million foreclosure lawsuit against Bonita Springs-based McGarvey Development, a major builder of commercial buildings and upscale homes in Southwest Florida. The newspaper also reported that Cape Coral real estate empire of developer/broker Greg Eagle is being hit by a barrage of foreclosures and court judgments. Lenders have begun eight separate foreclosure lawsuits in Lee circuit court for big parcels of land he was assembling for a regional mall.
It appears that the long anticipated “other shoe” may indeed be dropping.
Scott R. Lodde