Commercial properties are now beginning to enter the deluge of foreclosures seen in the housing market. While a huge increase in distressed properties has not yet been observed, real estate experts expect the trend to soon surface.
"We haven't yet seen a material increase in pending foreclosures," Brigham Black, senior vice president of Pacific Office Properties said during a commercial real estate roundtable discussion held at The Daily Transcript offices on April 7.
Thus far, banks have been struggling with growing inventories of distressed residential properties. Bank protocol had not been developed to sell off such massive amounts of property, and thus banks lost by being non-responsive to offers, said Tony Pauker, chair of the Urban Land Institute.
Last year, Pauker contacted a bank to place a $3.1 million bid on a bank-owned property. The bank did not respond to the offer. He is now bidding on the same property at $1.1 million. The current bid is what the property is now worth, but the bank could have spared itself further losses by selling the property before it continued to depreciate, Pauker said. Banks are likely to try working out deals with owners to avoid foreclosure, sparing institutions the costs involved.
"It's not only that the banks don't want it," Pauker said. "It's that once they get it they have absolutely no idea what to do with it."
The commercial real estate market is in uncharted waters. While banks have now worked out processes for selling residential properties, they have not yet prepared for the pending onslaught of commercial property foreclosures, said Stath Karras, managing director of Cushman & Wakefield.
"We've never been down this road before," Karras said. "We have no idea what's going to happen."
Russell Dixon, chief executive officer of RedHill Realty, said he believes some markets may never fully recover. However, the multifamily residential market will come roaring back between 2011 and 2012, when a supply crisis will emerge, once again lifting prices.
For those looking to sell commercial properties, the present is not an ideal time, said Mark Read, senior managing director of CB Richard Ellis. Anticipating further trouble in the commercial market, Read advises clients needing to drop a property within the next five years to sell now. However, those who can hold out for another five or 10 years will see much better gains, he said.
Most people are very reluctant at this time to make such decisions regarding property, on both the ownership and leasing sides, said Joy Cole, general manager of Jones Lang LaSalle.
Due to such conditions, commercial real estate brokers are also being advised to renew tenants' leases.
"It's a tenant's market," said Read, and things are only likely to get worse for property owners. Read, who believes the market is currently situated in the middle of a three-year down cycle, expects to see office vacancy peak in early 2011 and the beginning of a recovery by the end of 2011.
In addition to changing the way properties are managed, tough economic times require different management strategies within brokerage firms. Retaining good employees can be challenging amid layoff worries. The best strategy is for employers to let employees know they are committed to both retaining a core group and making tough decisions, said Curtis Gabhart, principal and chief executive officer of Apartment Consultants Inc.
While most in attendance painted a grim picture of the current commercial real estate market, Linda Greenberg, senior vice president of Colliers International, highlighted a few of the brighter spots.
With research and development funds made newly available by the federal government, Greenberg expects to see more construction in the biotech industry. The market for health care facilities is also looking up, she said. All four of the major health providers in the region are currently building new facilities or acquiring land to build new facilities. Health care facilities are also in the process of complying with new seismic requirements, sometimes necessitating large-scale retrofits.
Another common occurrence in the retail market is large retailers leaving behind big box properties as they go out of business. Many of the properties will likely be split up and leased to several smaller stores; however, some will likely be converted to supermarkets, said Steve Avoyer, founder of Flocke & Avoyer. Only a few retailers have the means to take over such giant spaces. Recently, Forever 21 took over a vacant Mervyn's in Calexico, Calif.
Taking over existing properties is representative on a limited scale of the trend likely to overtake the entire industry. The future of the real estate industry is in urban infill, Pauker said. On the residential side, by the time the market bottoms out in 2012, there will be no entitlements remaining in the county, Pauker said.
When the commercial real estate market does experience a revival, it is likely to be much changed, Pauker said.
"There's nothing left that's outfill," he said.
Founder/Owner, Flocke & Avoyer
Senior VP, Pacific Ocean Properties
General Manager, Jones Lang LaSalle
CEO, RedHill Realty
Principal, ACI Apartments Inc.
Senior VP of Brokerage Services, Colliers International
Executive Managing Director, Cushman Wakefield
Chair, Urban Land Institute San Diego/Tijuana
Senior Managing Director, CB Richard Ellis Inc.