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Distressed commercial real estate market likely to linger for years

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Noting that $1.5 trillion worth of commercial loans will mature between now and 2017, Judy Hoffman, Trigild Inc. chief operating officer, warns that a full recovery may be years away.

Hoffman, who moderated a panel sponsored by Commercial Real Estate Women, or CREW San Diego at the Sheraton La Jolla within the past week, said given the majority of these loans will be maturing in 2015, 2016 and 2017, most of the impact has yet to be felt.

Hoffman said the commercial mortgage-back securities (CMBS) default rate is running at about 10 percent.

By comparison, she said, the commercial loan default rate for banks is currently about 3.5 percent.

With still-high levels of CMBS defaults, Hoffman said it is difficult to be too optimistic about the market.

“We’re not going to be through this unless and until values go way up,” Hoffman said, adding that property values are still down 35 percent from the peak of the market in the mid-2000s. “And banks are buying loans at such a discount now. We’ve got a long way to go. ”

Not everyone is always comfortable with buying this paper.

Romy Loseke, general counsel to Westcore Properties, said we’re incredibly selective when we’re buying notes.”

“There may be an opportunity if the borrower indicates being in distress, rather than in foreclosure,” Loseke said.

Banks may acquire other banks, and with them a bundle of distressed loans. When asked if that could create problems for the acquiring institution down the road, Hoffman said it needn’t be the case.

“You can have a very healthy bank with a lot of distressed loans,” Hoffman said.

Debra Shannon, a senior vice president with California Bank & Trust, whose institution acquired failed Vineyard Bank and Alliance Bank from the FDIC in 2009, said unlike the Resolution Trust Corp. in the 1990s, “the FDIC doesn’t encourage us to sell loans.”

Mo Vakili, a Deliotte & Touche, partner, said working with the regulator may be beneficial.

“The FDIC arrangements aren’t all the same. The FDIC may be able to share in your losses,” Vakili said.

While the interest rates may be at the most favorable rates in our lifetimes, Hoffman said traditional lenders continue to be reluctant to loan. “We are seeing construction loans again.”

Assuming the funds are found for an acquisition of a loan or a property, Shannon said, “it is important to understand what is motivating the seller so you can make the best deal with them.”

Shannon warns prospective loan buyers that FDIC rules can stymie the process, however, “as the regulatory agency would rather problem debts be worked out rather than sold.”

Some lenders choose to put distressed properties into receivership rather than into foreclosure as a way of maximizing the value of the asset.

“You want to avoid bankruptcy if you can,” said Marjorie Burchett, a partner with the law firm of McKenna Long & Aldridge, “because it means a huge delay, expense, and either side is going to have to hire a lot of lawyers.”

Shannon agreed.

“If you’re selling a note and you’re in a bankruptcy situation, most lenders won’t touch it,” she said.

Kelley McLaren, Trigild managing director of receiver services, also said selling a property through receivership has multiple advantages, “and is often a good strategy for getting the highest recovery.”

Loseke spoke of the challenges of the current market conditions, such as when her firm has had as little as 24 hours to put in bids on distressed properties.

Westcore, which owns millions of square feet of industrial and office properties from San Diego to Switzerland, doesn’t just buy anything.

“We are incredibly selective,” Loseke said .

Vakili said being highly selective only makes sense.

“This involves taking a step back from the madness,” Vakili said. “Then you look at each property strategically instead of looking at an entire portfolio as a whole.”

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Westcore Properties

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4445 Eastgate Mall. Ste., 210
San Diego, CA 92121

Westcore Properties Executive(s):

Gary Katz

  • Director

Donald Ankeny

  • Chief Executive Officer