EE_
10th January 2011, 11:38 AM
Long over-due report
The writer is delusional with hope.
REAL ESTATE: Commercial delinquencies rising as landlords struggle
Still, analysts see signs of market healing
REAL ESTATE: Commercial delinquencies rising as landlords struggle By ERIC WOLFF - ewolff@nctimes.com North County Times - The Californian | Posted: Saturday, January 8, 2011 12:00 am
A store front for lease is shown at the Temecula Town Center at Rancho California and Ynez roads in Temecula on Thursday. The mall's owners owe $67 million and they haven't made a payment in more than 90 days. (Photo by Hayne Palmour IV - Staff Photographer)
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Related: View a Google map of commercial properties with delinquent loans
http://www.nctimes.com/html_60397b34-1baf-11e0-b9f8-001cc4c002e0.html
The owners of Temecula Town Center, a mall at Rancho California and Ynez roads, have a problem some homeowners can relate to ---- they are behind on their loans.
Way behind: The mall's owners owe $67 million, and they haven't made a payment in more than 90 days, according to commercial real estate analyst Trepp LLC in New York City.
No one likes to talk about trouble in their business, which may be why the owners of the mall did not return calls for comment, but they're hardly the only ones struggling.
Trepp measures loans that were bundled into bonds, called commercial mortgage-backed securities. Paul Mancuso, a Trepp vice president, said such bonds make up about 25 percent of the total commercial loan market, but Trepp's research indicates they closely mirror what's happening among all commercial loans.
In San Bernardino and Riverside counties, borrowers with $1.4 billion in loans are at least 30 days behind on their payments. That's 20.2 percent of the two counties' total loan balance.
In San Diego County, borrowers with loans worth $755 million are delinquent, about 7.7 percent of total commercial loan dollars. Nationally, late payers compose 9.2 percent of total loan balances. All three rates more than doubled since October 2009.
Commercial loans are a telltale for the economy, though one that lags. When consumers stop traveling, getting their hair styled, or having their taxes done by an accountant, those businesses either skip rent payments or close altogether. As tenants disappear, owners of hotels, shopping malls, and offices stop making loan payments, which can push building owners into default.
The rapid rise in commercial debt delinquency comes three years after a spike in residential foreclosures kicked down the national economy. Some economists worried that a similar collapse in commercial debt could drag the national economy into a second recession, but recent signs of increased transactions suggest the commercial borrowers may be digging their way out.
Unlike residential loans, which are generally owned by big lenders or pension funds, commercial loans are often held by small and regional banks that wanted a chance at big returns during the construction boom of the 2000s. As a result, some local banks carry investment portfolios laden with delinquent construction loans or commercial mortgages.
As borrowers stop paying, these banks can fail. Commercial and construction loans toppled La Jolla Bank FSB in February, according to the Federal Deposit Insurance Corp.
Commercial brokers attributed the recent jump in delinquencies to a confluence of factors: Many of the delinquent loans were made between 2005 and 2007, when lenders paid scant attention to borrowers' ability to repay; some property types, such as office buildings, have long lease periods that are just now becoming delinquent; and some lenders have decided to pressure delinquent borrowers into selling or finding new money.
Trouble in Southwest County
Southwest Riverside County suffered in particular from rising unemployment and plummeting real estate values, pushing commercial borrowers over the edge. Of the 112 properties in San Diego, San Bernardino and Riverside counties Trepp said were 90 days or more behind on their payments, a quarter came from Southwest County.
Temecula Valley "has had it really hard," said David Horenstein, managing partner for CKHS Partners, which owns the Shops at Clinton Keith in Wildomar.
Horenstein's own mall was 90 days behind and the partners owed $8.9 million, according to Trepp, but Horenstein said they've caught up.
Southwest County may have suffered particularly from lenders handing out loans to unworthy borrowers during the height of the construction boom between 2005 and 2007, Mancuso said.
"Those revenue projections were quite rosy based on the environment at that time. People were continuing to project on an upward trajectory," he said. "Immediately the economic landscape did a complete 180, valuations started to plummet. A lot of these loans that were highly leveraged to begin with really ran into difficulties quite quickly during that time period."
San Diego County resisted those trends in part because much of its commercial construction took place before the boom turned into a frenzy, brokers said. The delinquency rate stayed low, too, because lenders and investors had more confidence that values would rebound, and thus were more likely to cut deals with borrowers.
Problems in waves
The turn of the economy buffeted commercial borrowers in waves, said Bob Prendergast, a San Diego managing director for real estate services company Jones Lang LaSalle.
Hotels saw an almost immediate drop in revenue as business travelers canceled trips; a drop in consumer spending hit retail stores next. Office tenants tend to be on long leases, so it took years for downsizing businesses to escape leases they could no longer afford. As each of these groups suffered, building owners struggled more to make their loan payments.
"It took a while for the compounding effect of the recession to hit different asset classes," Prendergast said.
As revenue declined, commercial borrowers turned to their lenders for help. Unlike a residential borrower, who may owe a few hundred thousand dollars, commercial borrowers owe millions of dollars, often tens of millions. With that much debt, they have more leverage to work out a deal with their lenders.
When the federal government adjusted accounting rules in 2009, it allowed lenders to avoid revaluing property unless it was foreclosed or sold. Thus lenders avoided reporting a hit to their bottom line by making deals with borrowers, Prendergast said.
Sometimes lenders took a stake in borrowers' buildings; sometimes they accepted reduced payments for an indefinite period in the hopes that the market would rebound and the borrowers could catch up. The strategy became so prevalent that commercial brokers developed a series of colorful names for it, such as "extend and pretend" or "a rolling loan gathers no loss."
In consequence, borrowers kept their properties off the market, and lenders tried to stay alive despite lost income.
Possible healing
But after accepting reduced or no payments for three years or more, the amount of back payments accumulated beyond some lenders' tolerance, said Douglas McCauley, Ontario manager for Marcus & Millichap Real Estate Investment Services, Inc. As a result, some lenders have begun to foreclose, or to demand that their borrowers make deals to sell the property.
"That's the crack you're looking at there," said Tim Winslow, a commercial real estate agent with Cassidy Turley Commercial Real Estate Services in San Diego. "I could see people, in some situations, making payments and have a negative cash flow position until they throw in the towel, and say 'We'll never recover from this.'"
As a result, lenders and borrowers are becoming open to the idea of selling, even at a reduced price. Winslow saw a big jump in sales and leasing activity in 2010, and he thinks 2011 will be busier.
McCauley said not only were there more sellers, but investors desperate for relatively safe investments were also looking to commercial real estate, especially apartment buildings.
That may be a sign the market is healing, though he expects the process to be very slow.
Meanwhile, the overall economy could be on the rebound.
Horenstein, the Wildomar mall owner, said he worked out his loan problems with his lender. He replaced a closed restaurant with a new one, and his occupancy and rents were rising again.
"We've been very lucky," he said. "I hope things improve around the valley; I think things will."
http://www.nctimes.com/business/article_60aaef20-48ad-5df4-83ee-55cdc4fc0a87.html
The writer is delusional with hope.
REAL ESTATE: Commercial delinquencies rising as landlords struggle
Still, analysts see signs of market healing
REAL ESTATE: Commercial delinquencies rising as landlords struggle By ERIC WOLFF - ewolff@nctimes.com North County Times - The Californian | Posted: Saturday, January 8, 2011 12:00 am
A store front for lease is shown at the Temecula Town Center at Rancho California and Ynez roads in Temecula on Thursday. The mall's owners owe $67 million and they haven't made a payment in more than 90 days. (Photo by Hayne Palmour IV - Staff Photographer)
Loading…
Related: View a Google map of commercial properties with delinquent loans
http://www.nctimes.com/html_60397b34-1baf-11e0-b9f8-001cc4c002e0.html
The owners of Temecula Town Center, a mall at Rancho California and Ynez roads, have a problem some homeowners can relate to ---- they are behind on their loans.
Way behind: The mall's owners owe $67 million, and they haven't made a payment in more than 90 days, according to commercial real estate analyst Trepp LLC in New York City.
No one likes to talk about trouble in their business, which may be why the owners of the mall did not return calls for comment, but they're hardly the only ones struggling.
Trepp measures loans that were bundled into bonds, called commercial mortgage-backed securities. Paul Mancuso, a Trepp vice president, said such bonds make up about 25 percent of the total commercial loan market, but Trepp's research indicates they closely mirror what's happening among all commercial loans.
In San Bernardino and Riverside counties, borrowers with $1.4 billion in loans are at least 30 days behind on their payments. That's 20.2 percent of the two counties' total loan balance.
In San Diego County, borrowers with loans worth $755 million are delinquent, about 7.7 percent of total commercial loan dollars. Nationally, late payers compose 9.2 percent of total loan balances. All three rates more than doubled since October 2009.
Commercial loans are a telltale for the economy, though one that lags. When consumers stop traveling, getting their hair styled, or having their taxes done by an accountant, those businesses either skip rent payments or close altogether. As tenants disappear, owners of hotels, shopping malls, and offices stop making loan payments, which can push building owners into default.
The rapid rise in commercial debt delinquency comes three years after a spike in residential foreclosures kicked down the national economy. Some economists worried that a similar collapse in commercial debt could drag the national economy into a second recession, but recent signs of increased transactions suggest the commercial borrowers may be digging their way out.
Unlike residential loans, which are generally owned by big lenders or pension funds, commercial loans are often held by small and regional banks that wanted a chance at big returns during the construction boom of the 2000s. As a result, some local banks carry investment portfolios laden with delinquent construction loans or commercial mortgages.
As borrowers stop paying, these banks can fail. Commercial and construction loans toppled La Jolla Bank FSB in February, according to the Federal Deposit Insurance Corp.
Commercial brokers attributed the recent jump in delinquencies to a confluence of factors: Many of the delinquent loans were made between 2005 and 2007, when lenders paid scant attention to borrowers' ability to repay; some property types, such as office buildings, have long lease periods that are just now becoming delinquent; and some lenders have decided to pressure delinquent borrowers into selling or finding new money.
Trouble in Southwest County
Southwest Riverside County suffered in particular from rising unemployment and plummeting real estate values, pushing commercial borrowers over the edge. Of the 112 properties in San Diego, San Bernardino and Riverside counties Trepp said were 90 days or more behind on their payments, a quarter came from Southwest County.
Temecula Valley "has had it really hard," said David Horenstein, managing partner for CKHS Partners, which owns the Shops at Clinton Keith in Wildomar.
Horenstein's own mall was 90 days behind and the partners owed $8.9 million, according to Trepp, but Horenstein said they've caught up.
Southwest County may have suffered particularly from lenders handing out loans to unworthy borrowers during the height of the construction boom between 2005 and 2007, Mancuso said.
"Those revenue projections were quite rosy based on the environment at that time. People were continuing to project on an upward trajectory," he said. "Immediately the economic landscape did a complete 180, valuations started to plummet. A lot of these loans that were highly leveraged to begin with really ran into difficulties quite quickly during that time period."
San Diego County resisted those trends in part because much of its commercial construction took place before the boom turned into a frenzy, brokers said. The delinquency rate stayed low, too, because lenders and investors had more confidence that values would rebound, and thus were more likely to cut deals with borrowers.
Problems in waves
The turn of the economy buffeted commercial borrowers in waves, said Bob Prendergast, a San Diego managing director for real estate services company Jones Lang LaSalle.
Hotels saw an almost immediate drop in revenue as business travelers canceled trips; a drop in consumer spending hit retail stores next. Office tenants tend to be on long leases, so it took years for downsizing businesses to escape leases they could no longer afford. As each of these groups suffered, building owners struggled more to make their loan payments.
"It took a while for the compounding effect of the recession to hit different asset classes," Prendergast said.
As revenue declined, commercial borrowers turned to their lenders for help. Unlike a residential borrower, who may owe a few hundred thousand dollars, commercial borrowers owe millions of dollars, often tens of millions. With that much debt, they have more leverage to work out a deal with their lenders.
When the federal government adjusted accounting rules in 2009, it allowed lenders to avoid revaluing property unless it was foreclosed or sold. Thus lenders avoided reporting a hit to their bottom line by making deals with borrowers, Prendergast said.
Sometimes lenders took a stake in borrowers' buildings; sometimes they accepted reduced payments for an indefinite period in the hopes that the market would rebound and the borrowers could catch up. The strategy became so prevalent that commercial brokers developed a series of colorful names for it, such as "extend and pretend" or "a rolling loan gathers no loss."
In consequence, borrowers kept their properties off the market, and lenders tried to stay alive despite lost income.
Possible healing
But after accepting reduced or no payments for three years or more, the amount of back payments accumulated beyond some lenders' tolerance, said Douglas McCauley, Ontario manager for Marcus & Millichap Real Estate Investment Services, Inc. As a result, some lenders have begun to foreclose, or to demand that their borrowers make deals to sell the property.
"That's the crack you're looking at there," said Tim Winslow, a commercial real estate agent with Cassidy Turley Commercial Real Estate Services in San Diego. "I could see people, in some situations, making payments and have a negative cash flow position until they throw in the towel, and say 'We'll never recover from this.'"
As a result, lenders and borrowers are becoming open to the idea of selling, even at a reduced price. Winslow saw a big jump in sales and leasing activity in 2010, and he thinks 2011 will be busier.
McCauley said not only were there more sellers, but investors desperate for relatively safe investments were also looking to commercial real estate, especially apartment buildings.
That may be a sign the market is healing, though he expects the process to be very slow.
Meanwhile, the overall economy could be on the rebound.
Horenstein, the Wildomar mall owner, said he worked out his loan problems with his lender. He replaced a closed restaurant with a new one, and his occupancy and rents were rising again.
"We've been very lucky," he said. "I hope things improve around the valley; I think things will."
http://www.nctimes.com/business/article_60aaef20-48ad-5df4-83ee-55cdc4fc0a87.html