Commercial Real Estate Market Update: More Pain Turns to Gain

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Things are looking up as troubled asset volume continues downward. Fourth quarter reports had the percentage of commercial properties selling at distressed prices sliding to its lowest rate since mid-2009. Office was the biggest distressed sector at $42.8 billion, industrial the smallest at $12.3 billion in property, and retail was right in the middle at $27.8 billion, Real Capital Analytics reported in fourth quarter. According to expert projections on a recent “Commercial Real Estate Show,” the commercial real estate market is still another 18 months away from returning to ideal levels of problem assets.

As of late October, Atlanta had 588 distressed properties totalling nearly $6.52 billion. Of that sum, retail had the most properties at 164 (27.9%, followed by apartments at 22.8%) and office held the biggest chunk by dollar volume ($2.56 billion or 39.25%).

Within the retail sector, strip centers were the most distressed niche. In the first week of 2013, the Atlanta Journal-Constitution reported that the 1.2 million sq. ft. Mall at Stonecrest, located just east of Atlanta, had the $98.7 million balance on its loan transferred to a special servicer. That comes on the heels of Gwinnett Place Mall going into foreclosure and Southlake Mall requiring special servicing last year. Most of the newly distressed situations are borne of maturity defaults on CMBS loans.

RCA’s October report indicated nearly $26.1 billion in outstanding retail distressed property, down 12 percent from the start of 2011. The retail recovery rate (before costs and fees) was 62 percent, the second lowest next to land at 57 percent (Industrial and office had the highest recovery rates at 71 and 70 percent, respectively).
Nationally, Tesco, the largest retailer in the United Kingdom, signaled in early December that the company’s pull-out of U.S. markets was all but assured. CoStar’s Tim Trainor wrote that Tesco’s launch timing right before the global recession and its choice of Los Angeles, Las Vegas and Phoenix, three of the hardest hit housing markets, constituted a calamitous combo.

Citing the research firm Trepp LLC, a Wall Street Journal report stated that CMBS investors in retail properties sold at a loss since 2010 recovered not even 50 cents on the dollar. That rate is a worse recovery than most other CRE property types, which ranged from a 36.6% average loss for office buildings to 48.8% for hotels, according to Trepp. Additionally, 56% of newly issued securitized mortgages in 2010 were retail, according to Amherst Securities Group’s Darrell Wheeler, a number that had dropped to 33.4% by fourth quarter 2012, retail’s lowest share since 2008.

According to a December FDIC report, the number of banks on its “Problem List” fell from 732 to 694, which marked the sixth consecutive quarter that the troubled tally had tapered off. Also, third quarter 2012 was the 13th consecutive period in which the earnings of commercial banks and savings institutions registered a year-over-year increase.

Bull Realty, Inc., Research

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