LWR Commercial Real Estate
Commercial Investment
May Outlook For Commercial Real Estate
May 5th
Despite the general grimness of the market, there is good news. One of the saving graces in Sarasota has been that we did not overbuilding in the commercial market. The value of building condos was too great in 2004-2006 to consider straying into commercial development. The Urban Land Institute makes some good observations:
In terms of commercial real estate, while vacancies are up in all market sectors, relatively little overbuilding has occurred, with the exception of the retail market, Nadji said. As a result, while the office market has been affected by high job losses, vacancies are not as severe as they would have been had an excess of space been built prior to the recession. There are lucrative purchasing opportunities in the office market for those who are in a position to buy, he noted. Despite the layoffs in the financial sector, New York City, with a vacancy rate of about 10 percent, tops Marcus and Millichap’s list of healthy office markets. Detroit, with an office vacancy rate exceeding 25 percent, ranks as the worst.
In the commercial market, the apartment sector shows the most promise in terms of a rally, with as many as five million echo boomers entering the housing market starting in 2011, the panelists said. With apartment construction at a standstill and few new projects planned, demand will outstrip supply when the economy improves, and echo boomers start getting jobs and “stop living with their parents,” Nadji said. New York City currently top’s Marcus and Millichap’s list for apartment markets, with a vacancy rate of under 4 percent, while Jacksonville ranks as the worst apartment market, with a vacancy rate of nearly 13 percent.
Working Sarasota’s Distressed Properties
May 5th
This is an excellent resource from CIRE on workign with distressed properties in this market. Remembering that the other side is under more pressure than usual is key to undertsanding how you facilitate the negotiations and the due diligence process.
Do It Right: The ABCs of Due Diligence for Distressed Properties
By John F. Dougherty Jr.
Clients new to the world of commercial investment real estate may be salivating at the thought of a market filled with undervalued properties that can be had for a song. Do them a favor and inject a little reality into their dreams of market domination. Remind them that distressed properties are called distressed for a reason: Although the term may fit the seller’s frame of mind and circumstance, buyers should realize that such properties often have tenancy and deferred maintenance problems. Fully occupied, class A assets rarely come on the market — even if the owner has financial problems. And if they do, well, take a number and join the other buyers who are probably willing to offer the asking price, if not more.
While today’s market offers plenty of opportunities in distressed properties, buyers must conduct in-depth due diligence to determine what a property is worth. Before clients agree to a purchase price they think reflects a property’s distressed condition, offer them this checklist of items to consider along with an appreciation of what can happen once the acquisition has closed.
Due Diligence Checklist
Tenants. Review and confirm the terms of all leases, paying particular attention to co-tenancy clauses, which are common in retail properties. These allow retailers to reduce the base rent, eliminate base rent and pay percentage rent based on sales, or terminate a lease when an anchor tenant or another identified tenant exits the property. Other items to take note of include “early outs,” which permit tenants to terminate leases in advance of normal termination dates, downsizing rights that allow tenants to reduce the size of the leased premises, tenant bankruptcies, and claims by a tenant against the landlord.
Require estoppel certificates from each tenant. This item usually is subject to negotiation between the seller and buyer as to the number of estoppel certificates required and, if less than all, from which tenants (anchors, occupants of more than a certain number of square feet). It also will indicate whether the seller is in default.
Existing Indebtedness. Buyers may be able to assume an existing mortgage or other debt, but they should expect lenders to re-underwrite the terms, which may result in higher debt service, a shortened maturity, and increases in the real estate taxes, insurance, or tenant improvements impound or escrow accounts. In addition buyers must pay an assumption fee and the debt holder’s counsel fees and costs. As a condition to assumption, lenders may insist on a guarantee of all or a portion of the indebtedness.
At the same time, buyers can negotiate deferring interest payments, principal or both; reduction in the principal amount of the debt based upon the value of the property; a change in the interest rate; and reductions in the real estate tax, insurance and/or tenant improvement impound or escrow accounts.
Appraisal. A current property appraisal should be obtained. The appraiser will value the property using comparable recent sales, replacement costs, and capitalization of income methods. In the current economy, the first and last of the three methods may not be completely reliable as to value. With few recent sales of commercial properties other than foreclosures, relying on comparable sales is questionable, while the lack of activity has resulted in uncertainty as to the interest rate to be used in the capitalization of income method.
Physical Condition. A licensed engineer’s inspection should confirm the property’s repair and maintenance needs, both long term and near term, as well as estimates of these costs. There may be a difference between what the seller thinks is necessary and the associated costs and what the engineer thinks is necessary.
Violations of Laws. To obtain proper assurances that the property is fully compliant with applicable laws, codes, and regulations, including zoning and subdivision ordinances, contact the local governing bodies with jurisdiction over the property. If the property is not compliant, find out from local officials if the violation must be fixed in advance of closing and ask the engineer what it will cost.
Environmental. A current phase 1 environmental site assessment is a requisite to a commercial real estate acquisition. If the inspection reveals environmental problems, a phase 2 assessment may be required. Existing and prospective environmental remediation plans must be taken into account, in terms of time frame and costs. An environmental expert can assist on both of these items.
Title and Survey. Does the seller have the financial ability to satisfy all of the liens and judgments that the buyer does not intend to assume? In addition, covenants and operating agreements with third parties regarding access and maintenance of common areas must be carefully reviewed and the terms confirmed, particularly regarding who bears the cost of maintenance and repairs. Also, obtain estoppel certificates from third parties indicating that there is no default on the seller’s part.
Litigation. Does the seller have the ability to settle existing litigation that could delay the closing or result in a new judgment lien filed prior to closing?
Service Contracts. Is the seller current in payment and is each contractor willing to continue providing the agreed to services on the same terms and conditions following closing?
Management. Will the buyer manage the property or hire a third-party management company? Consider engaging the management company currently handling the property to continue, even if the company is owned by the seller. Determine general management and lease-up fees, owner termination rights, and controls over rent receipts and the use thereof by the manager.
Once the due diligence is completed, the buyer should re-examine the financial model used in deciding on the purchase price. Make sure clients have a due diligence or other out in the purchase agreement that allows them to re-negotiate the purchase price in light of the findings.
Major Changes in Commercial Real Estate
Apr 30th
With the mushrooming cloud of commercial real estate loans that are expected to default over the next two years, mortage acquisition groups are gearing up for what some term “the wild wild west”.
Read on:
Two years after fissures in the residential housing market gave way to a national collapse of home prices and sales, experts warn the next shoe to drop is the commercial real-estate market, bringing more woes to the battered economy.
Thousands of commercial mortgages valued at hundreds of billions of dollars are approaching a renewal date. By some estimates, two out of every three will no longer meet the original loan conditions and won’t be able to refinance. And with prices for commercial properties expected to plunge, a vicious cycle may unfold much as it has in the nation’s housing market.
“It’s the next wave to hit. It’s the next round of bad news,” said Scott Talbott, the senior vice president of government affairs for the Financial Services Roundtable, a trade group for big banks and other financial institutions who are collectively concerned about the coming problems.
A commercial mortgage meltdown is likely to prolong the nation’s economic recovery. The falling prices in commercial real estate will lead to additional bank losses at a time when banks are sapped by home mortgage defaults and soaring credit card defaults. This could lead to future additional taxpayer assistance for the banks.
The reality is already on display. On April 16, the nation’s second largest mall developer, General Growth Properties, filed for bankruptcy protection. The Chicago-based company owns more than 200 malls across the U.S., and was unable to renegotiate its debts as they came due.
Six days later, a 40-story office tower on New York’s Avenue of the Americas was seized by its creditor, a Canadian-owned pension fund. The tower’s owner, Macklowe Properties, couldn’t meet loan terms.
“On the street, the rumor is it is coming and it’s going to come fast and furious. Some people are predicting September,” said Paul Waters, a New York-based executive vice president of brokerage operations in North America for NAI Global, a top-five commercial real estate brokerage with operations across the globe.
Just like the housing meltdown, the commercial real estate crunch is likely to begin as a slow bleed that gains momentum. The coming commercial real-estate crunch is likely to be spread evenly across the nation, in large part because of an outgoing economic tide that’s spared few companies anywhere.
“There’s going to be a lot of trouble on Main Street with some of these commercial and industrial buildings. The biggest impact will be on some of the smaller owners,” Waters said. “The smaller local regional players that are stretched thin may have some great difficulties with their mortgages.”
How bad it gets will depend on speed of economic recovery. Office space and multifamily apartments, two huge components of commercial real estate, are highly dependent on employment. Even if the economy begins growing again late this year as forecast, the number of unemployed is expected to keep rising well into next year.
“The translation is that office vacancy rates would continue to rise until mid-to late-2010,” said Christopher Cornell, an economist specializing in commercial real estate for Moody’s Economy.com, adding that “it’s a drag on the recovery” well into next year.
The last crisis in commercial real estate — which includes office space, malls, industrial parks and multifamily apartments — came in the early 1990s. The problem then was an oversupply of new properties. Today, the driver is a deep economic downturn, with the economy contracting by more than 6 percent in each of the last two quarters.
As in the housing meltdown, weakened lending standards are a big part of the story for commercial real estate. Unlike housing, however, the ill effects from weakened commercial lending standards have been camouflaged to date because they’ve had a longer horizon than housing did over which to implode.
“If you take a look between 2005 and 2007, the underwriting standards on both the consumer side and the commercial side were spinning out of control,” said Kevin Blakely, the president of the Risk Management Association, a Philadelphia-based trade group for financial risk managers. “I think it is a bigger issue than we like to admit.”
In housing, many of the loans with poor underwriting went bad within two years, when adjustable-rate mortgages were due to reset to higher interest rates and raise monthly payment costs for homeowners.
However, commercial properties carry mortgages with lives of five years or 10 years. And these loans issued from 1999 to 2007 are coming up for a rollover — refinancing under similar terms. Today’s economic downturn and credit crunch makes that unlikely, however, as credit standards have tightened.
As in housing, many commercial properties have mortgages that were bundled together in pools, sliced and diced and instead of being held by banks were sold to investors as bonds and securities. Thousands of these commercial mortgage-backed securities, or CMBS, are reaching their maturity dates over the next three years. Ten-year mortgages issued in 1999 and 2000 start coming due late this year, and five-year loans issued from 2005 to 2007 come due early next year.
“If you stop and think about what is coming up for maturity over the next couple of years, either on the banks’ books or CMBS, there is going to be a day of reckoning as those loans mature and they have to be rebalanced and reset to today’s underwriting standards,” said Blakely, who worked 17 years as a bank regulator followed by 17 years as a bank executive and risk officer.
A March study by the Wall Street arm of Deutsche Bank, Germany’s largest financial institution, points to this day of reckoning. It found that the number of U.S. commercial loans that hadn’t refinanced within a month of their end date had tripled.
Refinancing usually happens months ahead of the end date. Since October, commercial refinancing has dropped from a pace of more than 400 mortgages a month to fewer than 100 a month, the bank said.
The report, entitled “Commercial Real Estate at the Precipice,” said that under lenient underwriting standards, 56.8 percent of existing commercial mortgages wouldn’t qualify for refinancing. Using conservative standards, two thirds won’t make the grade.
That suggests that lenders will have to extend loans, much like they’ve tried to freeze adjustable-rate residential mortgages at their original lower rate to avoid a foreclosure. Even if the commercial loans are simply extended for a year or two, however, commercial real-estate prices are forecast to keep dropping so the time bomb will be delayed not defused, the report concluded.
“In our view, much of these losses are unavoidable, even in a mass (loan) extension environment,” wrote Richard Markus, the report’s author.
Forecaster Moody’s Economy.com expects $375 billion in losses on the $3.5 trillion in commercial mortgage loans and securities outstanding. That’s a loss rate of about 11 percent, nearly twice the rate of home mortgage foreclosures, and the forecaster thinks that about $200 billion of those commercial losses are still ahead.
“This is significant, but small compared to the over $1.1 trillion losses ultimately expected on residential mortgage loans and securities. Commercial mortgage losses will be a significant problem for many mid-sized and small banks,” said Mark Zandi, the chief economist for Moody’s Economy.com. “In fact, most of the banking failures that occur in the next several years will be due to losses on commercial mortgage loans.”
Earlier this year, the Treasury Department and Federal Reserve announced a program in which they’ll lend to investors willing to purchase the safest, top-rated commercial mortgage-backed securities. The Fed is trying to use its power as a lender of last resort to help keep some credit flowing into commercial real estate markets. This effort, however, is of limited importance because it targets the safest of commercial mortgages and won’t address all that ails this important sector.
Additionally, pools of commercial mortgages are expected to be included in the auction of so-called toxic assets being readied by the Treasury Department through a public-private partnership.
Still, commercial real-estate brokers are bracing for protracted hard times.
“There will be a re-engineering of the culture of the real estate business,” said Waters, the NAI Global executive, who expects few new development projects until the mortgage problem runs its course. “All the avenues to dispose (of bad commercial loans) are going to be utilized.”
Commercial real estate loan defaults skyrocket
Mar 30th
- 5011 Ocean Blvd Siesta Key FL
As loan defaults rise, analysts say the struggling commercial real estate industry is poised to fall into the worst crisis since the last great property bust of the early 1990s.
Delinquency rates on loans for hotels, offices, retail and industrial buildings have risen sharply in recent months and are likely to soar through the end of 2010 as companies lay off workers, downsize or shut their doors.
The commercial real estate market’s fortunes are tied closely to those of the sinking economy, especially unemployment, which hit 8.1 percent in February.
“Until jobs start coming back and industry starts doing better we don’t see performance increasing” among landlords, said Christopher Stanley, an associate with research firm Reis Inc.
While the commercial real estate industry’s woes led to the recession of nearly 20 years ago, this time the industry is “the victim of the economic and financial crisis,” said Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services in Walnut Creek, California.
Vacancies at retailers, Nadji forecasts, will shoot up to 11 percent by year-end, matching the peak of the early 1990s. Office vacancies are likely to hit 18 percent by year-end, he said, short of the 1990s-era peak of more than 20 percent.
The commercial real estate market is “at the precipice,” a report by Detusche Bank said earlier this month. So far this year, delinquency rates are up to 1.8 percent of loans in March, more than four times the year-ago level.
Faring worst were retailers, office building owners and apartment buildings. Hotels and industrial properties posted more moderate increases.
Deutsche Bank’s Richard Parkus projects delinquency rates will keep soaring to more than 3.5 percent by year-end and as high as 6 percent by late 2010. He says the industry’s woes will be “at least of a similar magnitude as those that the commercial real estate faced in the early 1990s.”
Drops in property values of 45 percent from a peak in late 2007 are possible, Parkus said, exceeding those of the early 1990s, as demand for office, retail and other commercial space plummets amid a worsening economy.
Adding credence to those gloomy predictions, the government said Thursday that the U.S. economy shrank at a 6.3 percent annual pace at the end of 2008, the worst showing in a quarter-century.
Funding for commercial loans virtually shut down last year as the financial system unraveled.
There was $12.2 billion in commercial mortgage debt issued last year, the lowest figure since 1991 and down 95 percent from 2007, according to a report by Reis.
Making matters worse, about $216 billion in loans are coming due through 2012.
That is putting landlords in a squeeze.
About $11 billion of distressed commercial property is currently up for sale, compared with a lackluster $2.7 billion worth of properties that were actually sold in February, according to Real Capital Analytics.
A growing imbalance between supply and demand is likely to push down prices in the coming months, analysts say.
Similar to the residential property market, foreclosures and defaults are surging, with nearly $19 billion in commercial real estate loans in default, foreclosure or bankruptcy so far this year, according to Jessica Ruderman, a senior analyst with Real Capital.
More than 20 metropolitan areas nationwide now have at least $1 billion in troubled commercial loans, she said, up from five at the end of last year. Landlords in Las Vegas, Manhattan and Los Angeles are struggling the most.
As the industry’s troubles worsen, disputes are breaking out. The Dubai developer helping build the $8.6 billion CityCenter complex on the Las Vegas Strip said Monday it is suing struggling partner MGM Mirage over concerns about the project’s viability.
One major shopping mall owner, Chicago-based General Growth Properties Inc. has been struggling to avoid bankruptcy for months. It faces a Friday afternoon deadline to get permission from lenders to avoid penalties for late debt payments.
Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Using the Sale Leaseback to Turn Commercial Real Estate Equity Into Operating Cash
Mar 10th
While land and empty spec office prices are plummeting, there is hope for owner-occupants who need to squeeze some cash out of their property. The sale-leaseback deals happening today aren’t giving owners as much money as they would have just a few years ago, but they can still cash in a relatively large amount of equity, just as the New York Times Co. will in its arrangement with investment management firm W. P. Carey & Co.
As the Commercial Proprty News rag reports:
The newspaper concern just entered into a sale-leaseback agreement involving the 750,000 square feet of office space it owns and occupies in the 1.5 million-square-foot Midtown Manhattan building at 620 Eighth Ave. For W. P. Carey, the deal means adding a stabilized two-year-old trophy asset to its portfolio; for the New York Times, it means pocketing $225 million while staying put in its digs.
For owners with challenging markets to navigate, the challenge to improve liquidity can be met in many different ways and the sale-leaseback is often one of the simplest.
“The opportunity to acquire an asset of this quality at this pricing level is clearly a sign of the times,” a W. P. Carey spokesperson told CPN. “It is certainly driven by the fact that sale-leaseback is still an attractive option when other forms of financing are not available.” The Times will use the proceeds from the transaction to pay down long-term debt. As described in its annual report, the sale-leaseback deal is just one of a handful of steps the company–plagued by plummeting advertising revenue and the challenge of refinancing debt–is taking to improve liquidity.
To see how your business can benefit from a sale-leaseback, contact me for an analysis of your property.
Commercial Real Estate Investment Down – Creates Opportunity
Feb 18th
As banks are writing down their portfolios and appraisers are throwing darts to value properties, the CRE market is in a freefall. Lease rates are falling, businesses are failing and defaulting on loans while new developments are housing crickets. Investment in commercial real estate across the globe plummeted 59 percent, going from just over $1 billion in 2007 to just $435 billion, according to real estate services firm Cushman & Wakefield Inc.
North America topped the list with a 73 percent decline in investment, followed by Europe, where investment plunged 52 percent, and then Asia, where numbers fell 45 percent. While investment activity slumped pretty much across the board, the numbers weren’t so drastic everywhere; in Latin America, investment dropped by a relatively low 9 percent.
But full recovery of the real estate market hinges on the economy. “Looking at the Blue Chip economic forecast, recovery will happen in the second half of 2009, but in any economy GDP recovers before jobs recover, and in real estate, we really care about jobs,” Stanton said. More jobs will spur demand for more office space, and will prompt increased spending at retail locations, and additional leisure and business travel. However, the anticipated economic turnaround will not have an immediate impact on the real estate industry. “Real estate recovery will lag a minimum of six months.”
The next 12 to 18 months will present the biggest buying opportunity in decades because a lot of leveraged assets have to be de-leveraged and will be sold at big discount. As borrowers are forced to write down their investments and are forced to slash values, or lenders are renegotiating the debt on their current loans, smart investors will have a chance to snap up some very well priced assets.
When the economy does recuperate and there’s more debt, real estate will likely recover quickly. “It should snap back,” Stanton said. “We actually had a controlled supply and demand situation; we just got hammered by the credit crisis and the recession. Presuming the stimulus package works, we’ll have a snap back because the real estate market did not overbuild. I have hope that we will get an Obama bounce.”
REO To Play a Large Role in Commercial Market in 2009
Feb 17th
As the housing market goes, so goes the commercial market. With retailers sluggish and small business closing up shop across the country, what role is the commercial real estate broker playing? The following is an excerpt from Commercial Property News and really shows the trend that I think we’ll be seeing more of.
The commercial real estate mortgage loan and REO portfolio has an outstanding balance of $221.3 million. The sale includes assets in bankruptcy and sub- and non-performing assets secured by a variety of collateral types including hospitality, industrial warehouse, retail, office, multi-family, residential condominiums, retail condominiums, townhomes, and commercial and residential development land throughout Arizona, Florida, Nevada, Texas, Georgia, Alabama and Louisiana.
On Jan 29, CPN reported that Sperry Van Ness–acting on behalf of Stillwater Capital and partners–closed the sale of the 131,900-square-foot Voice Road Plaza in Carle Place, N.Y., to a 1031 multi-family investor for about $36.2 million, including the assumption of a $23 million mortgage.
Occupying 8.3 acres on Long Island, Voice Road Plaza was developed in 1951 and renovated in 1996. In December 2006, Stillwater, along with two operating partners, snapped up the property from First Allied Corp. for nearly $35.4 million, with plans for a short-term hold. Vacancy at the property–anchored by Staples, Big Lots, Party City, Dress Barn and Bass–reached its current level of 98.8 percent. Then the tide turned. The seller had put the community shopping center up for sale through another broker before turning to Sperry Van Ness, which originally marketed the asset with a price tag of $41 million, before lowering it to $39 million.
After 10 months and 175 sale packages, Sperry Van Ness found a buyer represented by Double-Click Realty. Considering that Stillwater purchased Voice Road Plaza in 2006, and sold during one of the lowest points in the real estate market in quite some time, the fact that the company walked away with a nearly $1 million profit is somewhat significant.
Deals like this may become more common in the coming year. On Dec. 22, Robert Brunswick, founder, president & CEO of real estate investment management firm Buchanan Street Partners, told CPN that he anticipates sales volumes to probably rebound somewhat over the next 12 to 24 months, but noted that this will probably be primarily the result of distressed selling to avoid foreclosure and salvage some equity and/or REO sales.
Mission Capital is seeking the bids on behalf of a regional bank that was not named. Acquisitions could be made on individual loan pools, any combination of loan pools, or the entire portfolio. Overall, there are 50 loans or REOs within eight available pools, including 35 loans in Florida, four REOs in Florida, four loans in Georgia, three loans in Texas, and single loans in Alabama, Arizona, Louisiana and Nevada.
“In addition to many of the assets providing cash flow to offset operating expenses, the portfolio is divided into several single asset pools, allowing investors to target specific assets by performance, collateral type or geography based on their individual acquisition criteria,” Will Sledge, managing director at Mission Capital Advisors, said in a prepared statement.
Founded in 2002 by William David Tobin and Joseph A. Runk, Jr., Mission Capital is a boutique investment banking firm specializing in structuring the sale of performing, sub-performing, non-performing and charged-off residential, commercial, C&I, and consumer loan portfolios.
Creative Commercial Lending
Feb 17th
With banks tightening standards andn looking for 30% down to get a loan, many buyers are getting creative with sellers to get the transaction done. As the Business Journal puts it, these are old methods that are getting more popular:
The methods, which are used in lieu of applying for a new loan with a lender, aren’t new to the commercial real estate industry. Seller financing is used when the seller acts like a bank to lend some or all of the purchase price to the buyer. Sale-leasebacks are used when the owner of the property sells to an investor but stays in the building as a tenant, and assumable financing is used when the buyer assumes an existing loan from the seller.
“Before 2008, you didn’t see a lot of it because it wasn’t necessary,” said John Richardson, president of Grubb & Ellis/Phoenix Realty Group Inc. But as the credit crisis intensified during the second half of 2008, so did the volume of alternative forms of financing.
Among those deals was an industrial property on the Westside. Brian Bartlett, vice president of Grubb & Ellis/Phoenix Realty Group, represented the seller in the deal, which required both seller financing and the sale-leaseback of the facility.
Commercial Banking Might Hit a New Low
Jan 2nd
By John Hielscher
Published: Monday, December 29, 2008 at 1:00 a.m.
The banking crisis has reached the Kingdom of Id. “I think the bank might be in financial trouble,” warns The Duke in a recent The Wizard of Id comic strip. “What makes you think that?” asks The King. “Its new calendar only goes to February,” The Duke replies.
A bit of gallows humor may be one of the few ways to cope with the accelerating pace of U.S. bank failures.
Twenty-five banks had collapsed as of Dec. 18, the most since 50 went under in 1993. Banking regulators shuttered 12 in the fourth quarter, an average of one per week and nearly half of 2008’s total. Most experts predict 2009 will be even worse.
“It is quite likely that 200 to 250 will be merged out of existence in the next few quarters,” said Lutz-based bank analyst Richard X. Bove of Ladenburg Thalmann & Co.
Few expect to reach the depths of the S&L crisis, when 1,385 institutions crumbled from 1988 to 1990.
But the Federal Deposit Insurance Corp. is bracing for a wave of bank failures. This month the FDIC nearly doubled its operating budget to $2.24 billion to handle an “elevated” number of failures in the coming year. Staffing will increase 30 percent, including more than 800 new failure-related jobs.
“It is a prudent and measured response given the current banking environment,” said FDIC Chairman Sheila Bair.
The agency had coasted for quite a while. Only three banks failed in 2007. None went under from June 2004 through February 2007, the longest period without a failure since the FDIC was created in 1933.
Two Bradenton banks failed this year, First Priority Bank on Aug. 1 and Freedom Bank on Halloween night. They were the only Florida banks to succumb in 2008.
That is likely to change in 2009, as the Florida real estate crash claims more financial institutions.
Banks in the region are stuck with higher ratios of noncurrent loans to total loans than banks nationwide, while holding lower ratios
of equity capital to assets, their safety net to absorb losses.
Bottom line: Area banks are in worse shape than the rest of the country, says Sarasota banking consultant Tramm Hudson.
“Florida has been particularly hard hit with the recession, primarily because so much of our economy is dependent on tourism, retirement activities, construction and real estate,” he said. “You can’t have a drop of 30 percent or more in real estate values and not see a weakening in the bank ratios.”
As banks deal with the damage, many have tightened credit to consumers and businesses looking for loans. Borrowers with good credit and cash up front will still be able to get loans from the stable banks, Hudson says.
“The marginal borrowers will have a more difficult time getting loans, and likely will not be able to finance their businesses or lifestyles as in the past. Cash is king right now and will be for the foreseeable future,” he said.
Some local banks, especially the newer ones, are still eager to make loans. Florida Shores Bank-Southwest of Venice has originated more than $65 million in loans since opening last year, said president/CEO Jim Kuhlman.
“On top of that, we have exactly zero bad loans, and we are just under $100 million in total assets,” he said.
Profits tank
The nation’s 8,384 commercial banks and savings institutions earned a combined $1.7 billion in the third quarter, a gut-wrenching decline of $27 billion, or 94 percent, from last year.
Florida’s 311 commercial banks and thrifts were $559 million in the red, compared with a profit of $26.8 million the year before.
Some 58 percent of U.S. banks posted weaker profits in the quarter. Nearly a fourth reported a net loss.
Things were even tougher in Florida: just over half of the 275 commercial banks and two-thirds of the 36 thrifts lost money.
Nine banks, including First Priority, failed in the third quarter, the most in 15 years.
The FDIC’s secret “problem list” of troubled banks mushroomed over three months from 117 to 171 institutions, the highest total since 1995.
Both First Priority and Freedom appeared on that list before they were seized by regulators. But the list can miss — neither Washington Mutual nor Indy Mac, the nation’s two largest failures this year, made it.
Wachovia Bank, Florida’s largest bank by deposits, admitted that it was near failure when it struck a deal to sell to Citigroup. Wells Fargo then stepped in and made a sweeter offer for Wachovia.
Industry analyst BauerFinancial has 513 banks on its problem list, about 6 percent of the entire industry and up from 400 the previous quarter.
Nearly 6,000 banks, or 59 percent of the industry, earned Bauer’s top five- or four-star ratings.
“The number of recommended banks has been steadily shrinking as more and more banks are falling victim to the nation’s current financial crisis,” said Bauer President Karen Dorway.
Century Bank of Sarasota is one of 11 Florida banks rated a “zero,” the lowest grade given by Bauer. BankUnited and Riverside Bank of the Gulf Coast, which have local offices, also were rated at zero.
Bauer downgraded 7 of the 22 community banks based in Sarasota, Manatee and Charlotte counties in the third quarter. Others retained their ratings or were less than two years old and too new to rate.
Community National Bank of Sarasota County, based in Venice, was upgraded from a zero to a one star. Community continues to operate under a regulatory supervision agreement.
Paying to play
All U.S. banks, even the healthy ones, will be paying more to shore up the FDIC’s own finances. The cost of 2008’s failures have dropped the Deposit Insurance Fund — its ratio of reserves to cover insured deposits — to 0.76 percent from the required 1.15 percent.
Premiums for deposit insurance will rise by 7 basis points — 7 cents for every $100 of deposits — starting next year. Banks now pay between 5 and 43 basis points on deposits for FDIC insurance, with weaker banks paying the higher percentage.
That could affect what banks pay their customers on certificates of deposit and savings accounts. Banks may try to offset that higher cost by reducing interest rates on CDs, rates that have already been trimmed by the downward trend of all interest rates from Federal Reserve cuts.
FDIC officials continue to stress that the vast majority of the banking industry remains well-capitalized and strong enough to survive.
Banking consultant Hudson agrees, even though Florida and its banks are suffering more now than most states. People will continue to move to the fourth-largest state for its climate and business opportunities, he says.
“We need to work through the overhang of housing inventory, and I predict our economy will come roaring back, just like it did after 9/11,” he said. “The banks have enough capital for now to weather the storm. How they manage it will be the key to success.”
Saraota Commercial Real Estate Can’t Go Lower?
Dec 22nd
According to the venerable Mr. Braga of the Herald Tribune the Sarasota commercial real estate market has another 50% to drop. So if you consider that lease rates have fallen approximately 33% in the last year and sales prices have dropped almost in half, then landlords are basically going to be giving away the rest of their inventory.
Read on to hear what the doom and gloom crew have in store for us. I, for one, have seen renewed interest and deal making. Landlords that must are cutting their prices and those who don’t have to are content to wait it out. This will be a slower recovery, but not as precipitous as the naysayers.
Unhappy new year for commercial
Published: Monday, December 22, 2008 at 1:00 a.m.
The commercial real estate market has suffered this year as total sales and lease rates of everything from shopping centers to car dealerships have fallen.
But if you think things were bad this year, just wait until 2009.
“The next meltdown we are going to see is in commercial,” said Gordon Hester, a Siesta hard-money lender whose customers include both commercial and residential developers. “The value of commercial real estate will probably drop 50 to 60 percent.”
Investors began pouring money into commercial real estate in 2006, just after the residential real estate market peaked. Like residential investors, these commercial players abandoned the notion that properties need to kick off enough revenue to cover carrying costs, Hester said.
Instead, they banked on the bet that real estate could be purchased for one price and sold for a much higher price in a relatively short period.
“Now investors are only willing to pay based in returns,” Hester said. “For that to shake out, values have to drop.”
Unfortunately, the end of the “appreciation model” in commercial real estate coincides with one of the worst economic downturns since the 1930s.
Unemployment is up, consumer confidence and spending is down, and owners of shopping centers, hotels and office buildings are already feeling the pinch.
“After the Christmas season, we are going to see a ton of retailers and restaurants file for bankruptcy or go out of business,” said Jack McCabe, a Deerfield Beach-based real estate consultant. “Obviously this will affect shopping centers and strip centers and the office market.”
Sales dropping
The deterioration of the commercial real estate sector already is showing up in declining sales.
Only 89 properties in Sarasota County changed hands in 2008 for a total of $131.3 million, a 47.5 percent drop in sales volume from the 109 properties that sold for $250.3 million in 2007.
Office buildings saw the largest drop in dollar terms, followed by hotels and shopping centers.
“The whole thing is being driven by two things: the credit situation, which is nowhere at the moment, and investor confidence,” said Stan Rutstein, a commercial agent with Re/Max in Bradenton.
Rutstein pointed to the fact that Nate Benderson, Nathan Forbes and the Taubman Cos. recently announced they were postponing construction of the new University Town Center Mall.
“If developers like Benderson, Forbes and Taubman, who are national scope, are being cautious — if they don’t want to take a risk — then smaller players are not going to take a risk, either,” Rutstein said. “Two-thousand nine is going to be a very challenging year.”
Rutstein said that the only way commercial properties are going to move is if sellers come down hard on price. For example, a client who was offered $1.6 million from a bank for an acre near Wal-Mart in 2006, might only get $600,000 for that same property today.
“But there aren’t any takers because banks are out of the market,” Rutstein said.
The same downward trend is also affecting lease rates for both office and retail space, said Anthony Migliore, a commercial agent with Coldwell Banker in Sarasota.
“Landlords and owners are getting very reasonable,” Migliore said. “There was one case in which the owners of an office building in Lakewood Ranch gave one year free rent to the Juvenile Diabetes Research Foundation in return for signing a long-term lease.”
Of course, that is an extreme example, Migliore said. But it illustrates the kind of lengths landlords are willing to go to get space rented.
“They may not be able to sell the space, but at least they can get it leased and ride out the storm,” Migliore said.
Vacancies on the rise
“If you are a shopping center owner and you evict someone this year, you’re crazy,” said George Huhn, a Venice-based commercial real estate agent. “Vacancies are going to go through the roof, and everyone will be competing for tenants.”
A lot of landlords are opting to carry mom and pop retailers through the bad times with rent abatements, renegotiations of leases and forbearance agreements, Huhn said.
“They’re just looking to keep the guy in business, because something is always better than nothing,” Huhn said.
Retail sales in Sarasota County were down by nearly $70 million, or 11 percent, in September compared with the same month a year earlier, and that was before the financial crisis really took hold. So it is no wonder that retailers and landlords alike are struggling.
But as in the residential market where foreclosures have led to amazing deals for savvy investors, the collapse of the commercial real estate sector will provide ample opportunities for investors looking for deals.
“Banks already have commercial property available that they have foreclosed on,” Rutstein said.
“A good amount of it is dirt that has plummeted in value.”
For investors like Michael Averbuch, commercial land represents a once-in-a-lifetime opportunity.
“The biggest game in town is commercial land,” Averbuch said. “Banks in Southwest Florida are nothing more than walking corpses. They are sitting on land and developer loans — most of which are in default, and lot of that land will hit the market this year.
“The stuff is so distressed, that it can’t get more distressed.”
