By STAN BULLARD
As industry’s loan delinquencies rise, brokers vie for lender-owned properties
To find where commercial realty action will heat up in the credit crunch and recession, consider the marketing activities of the region’s brokerages.
Bob Nosal, managing partner of Grubb & Ellis Co.’s Cleveland office, hands over a glossy, full-color booklet touting the company’s ability to run commercial buildings for lenders who take them back from troubled borrowers. The services range from managing properties to, of course, disposing of them.
?We’re all going after the same thing,? Mr. Nosal said.
So far, there are few local commercial foreclosure filings, although signs of trouble are surfacing.
The volume of delinquent commercial loans as of Sept. 30 climbed to 7.5% from 3% on Sept. 30, 2007, in the Cleveland-Elyria-Mentor Metropolitan Statistical Area, according to data that Foresight Analytics, an Oakland, Calif., consultant produces with Federal Deposit Insurance Corp. reports. In the Akron MSA covering Portage and Summit counties, delinquent commercial loans climbed to 6% on Sept. 30 this year from 2.4% a year earlier.
Given those numbers, and with more traditional sources of brokerage business drying up due to the lack of loans and companies shelving growth plans in the recession, brokers see courting banks, lawyers and court- appointed receivers as a reasonable bet.
?This is clearly where the market is going. There is a structural change under way because of changes in lending practices combined with the unfolding of a deep recession,? said David Browning, managing director of CB Richard Ellis’s Cleveland office.
Warren Morris, CEO of Colliers Ostendorf-Morris in Cleveland, said he has made calls on prospective receivers for properties and banks but found they all are swamped ? and not just by economic woes.
?As a general rule, these people are being feverishly courted by the real estate consulting community,? Mr. Morris said. ?They’re generally looking for valuation services and, if they have a property in Omaha they’ve gotten back, someone to make sure it’s secure and the lights are off.?
Riding ‘the next wave’
So far, commercial property workout business is slim, but Bob Garber, a principal of the Cresco realty brokerage in Independence, sees it coming.
?It’s the next wave,? Mr. Garber said. ?It’s not like the lenders have lists and lists of properties like they do in residential. We did three sales for a bank in town that wanted to sell the properties, with the borrower’s cooperation, before going the full foreclosure route. They wanted to cut their losses, wash their hands of the real estate and move on.?
Mr. Garber declined to identify the bank or the properties but said they were user-owned industrial buildings in Cleveland, Middleburg Heights and Solon. The sale prices were not steals.
?They traded underneath a standard arm’s-length deal,? Mr. Garber said. ?It wasn’t 50 cents on the dollar but 70 to 80 cents on the dollar.?
One instance of a foreclosure involving a high-profile income- producing property is under way at WT Grant Lofts, a 2003 conversion of the long-empty department store to 77 rental apartments on the southeast corner of Cleveland’s Public Square.
Interwest Capital Corp., a La Jolla, Calif.-based real estate company, filed suit Nov. 12 in Cuyahoga County Common Pleas Court to foreclose against 222 Euclid LLC, a group led by Somerville Development Co. of Seattle that developed the property. Interwest acquired the $5.6 million construction loan for the project for an undisclosed amount last July from Huntington National Bank, which had funded the conversion project. Filing the foreclosure allows Interwest to obtain direct ownership of the property in the pending case.
Cynthia Chodak, who ran WT Grant for Somerville, did not return three calls on the pending case.
Karl Coleman, Interwest president, said the company buys distressed properties that can benefit from restructuring the debt or repositioning in the marketplace. He said Interwest in July also became the owner of the 163-room Quail Hollow Hotel in Concord by buying its mortgage and securing the deed from the prior owner.
?These are good properties,? Mr. Coleman said. ?They just have too much debt.?
If buying distressed mortgage debt sounds like an obscure business, look for that to become more mainstream.
Charles Ratner, CEO of Forest City Enterprises Inc., said in a Dec. 10 conference call that the $10.2 billion Cleveland realty company has been approached about buying distressed mortgage debt. Reviewing such opportunities and consulting with lenders on how to ?fix? broken projects will be activities the company pursues in the economic downturn.
Trouble on the home front
Meantime, the outlook for single-family and construction loans continues to worsen.
Among homebuilder and single-family land loans, Foresight Analytics estimates delinquency at 18% in the Cleveland MSA and 16% in the Akron MSA in the third quarter of 2008, big jumps from 7% in Cleveland and 5% in Akron in the third quarter of 2007.
Bo Knez, president of the Home Builders Association of Greater Cleveland trade group, said despite the rising numbers, builders are finding easier going now because they can identify which lenders want to remain active in homebuilding and which do not. As lender woes spread to other business types, Mr. Knez said builders are finding banks more understanding than two years ago.
?We were the first major industry to feel this,? Mr. Knez said. ?The culling of the herd is now happening to everyone. Even farmers are having trouble financing fertilizer.?