Distressed Real Estate Update: From Cellar to Seller's Market

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In the world of distressed real estate, what was a market in the cellar has officially become a seller’s market for many assets. As the values of troubled properties approach market values, banks are seeing more and more opportunities to clear out their inventories.

“There has been a sea change in demand. Banks should be cleaning out their inventory this spring,” Taylor Burke of the $2.62 billion Burke & Herbert Bank told CoStar.

Market Notables & Quotables [Click to enlarge]The senior executive vice president and chief lending officer of the Northern Virginia-based financial institution pointed to some long-awaited demand arising in outlying areas where not just income-producing assets, but also lots, are selling at last.

“The market has definitely turned with the recent influx of developers seeking new, larger land tracts,” said Mike Cahalan, vice president in Bull Realty’s Land & Developer Services division. “The bulk of bank-owned or foreclosed, entitled residential lots is quickly diminishing.”

Distressed sales as a percentage of total commercial transactions have been declining since the start of 2011. According to CoStar, they made up 20 percent of the dollar volume of deals that year, but only 11 percent last year.  There were $16 billion fewer distressed sales in 2012 than the year before. During the same period, total CRE sales increased 26 percent from $255 billion to $322 billion.

Questions do remain. Have investors cherry-picked the best of the distressed? Does a given price spread justify the risk of buying an empty or troubled building? How will carrying costs and slow turnaround times affect cash flow?

According to CoStar, multifamily and retail continue to be the top targets for distressed buyers. The latter sector was the only property type that saw an increase in distressed sales volume last year (4 percent increase over 2011). By comparison, distressed hotel sales were down 52 percent year-to-year; office down 45 percent; multifamily 26 and industrial 22.

Distressed office property sales are down 50 percent from 2012 levels by volume, but only 10 percent by count, according to a March Real Capital Analytics report. Transaction size has “fallen measurably as many of the larger situations were the first to be resolved.” In 2011, distressed office deals averaged $24 million, falling to $15 million last year and averaging around $12 million so far into 2013.

“In terms of supply and demand of product, it’s more of a seller’s market for bank holders of distress than it is a buyer’s market, especially for notes,” Joshua Anderson, COO of the Seattle-headquartered Roseview Group, told CoStar. “Geographically, the best opportunities are in markets that are showing some initial signs of recovery, but that are not as far along the curve as others yet. That applies to most of the Southeast and Midwest.”

Bull Realty, Inc., Research

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