Commercial real estate woes could worsen this year, experts say

As dissimilar as they are, a small shopping center in unincorporated Falcon, an apartment complex on Colorado Springs’ southeast side and a mini-warehouse storage facility near Peterson Air Force Base have something in common:

They all fell into foreclosure last year — signs of a distressed local commercial real estate market that experts fear will worsen in 2010.

“It’s anyone‘s guess if the pace will accelerate or slow down, but there certainly will be more,” Tom Dermody, a broker with the local office of national real estate firm Sperry Van Ness and part of the company’s asset recovery team, said of commercial foreclosures. “There are properties that are just hanging on.”

Here’s one measure of problems in the commercial market: Three years ago, the number of commercial properties with loan balances of $1 million or more, and which fell into foreclosure, totaled 15, according to a Gazette analysis of El Paso County Public Trustee records. A year later, the total was 24. In 2009, the number of commercial properties with loan balances of $1 million and up and that were foreclosed on had ballooned to 73.

“I think there’s going to (be) a flood of distressed properties coming back on the market,” said Jim Justus, president of Olive Real Estate Group, a Springs brokerage.

The Pikes Peak region’s residential market has had thousands of foreclosure filings over each of the past three years. While the commercial market won’t get that bad in terms of numbers of filings, commercial property owners nevertheless are being plagued by the same woes homeowners have faced: a horrible economy, tumbling property values and difficulty borrowing money.

Many homeowners who lost jobs or otherwise took hits to their pocketbooks found themselves unable to pay their mortgages. When they sought to stave off foreclosure by refinancing, some homeowners found themselves out of luck because property values had fallen and their homes were no longer worth what they needed to borrow to continue their loan.

The commercial market is on a parallel path. As businesses and employers have closed or downsized during the worst economy in decades, many office, retail and industrial building owners have lost tenants, while a lack of substantial job growth means the spaces aren’t filling up.

The combined vacancy rate for office and industrial buildings and shopping centers jumped to 13.1 percent at the end of 2009; two years earlier, it was 8.3 percent, according to Springs-based Turner Commercial Research.

Meanwhile, property owners who haven’t lost tenants face demands for free rent, lower lease rates or other concessions from businesses that are struggling.

Commercial owners whose rental incomes plunge are often then hit with a reduction in property values. When commercial loans come due (which, unlike home mortgages, happens every few years), property owners with declining values can’t get extensions from lenders.

Even if a loan is extended, appraisals might show a commercial property is worth less and lenders will reduce the amount of a new loan — requiring property owners to come up with cash to make up the difference, experts say.
The commercial market is similar to housing in another way: Even if commercial real estate falls into foreclosure, an owner has a chance to hold onto the property by catching up on loan payments or working out a deal with a lender.

Of commercial foreclosure actions last year, some were withdrawn; other properties are awaiting a sale at a Public Trustee’s auction; and, in other cases, lenders took back the properties.

Something else to note: When properties fall into foreclosure, the business associated with the property often continues to operate as usual.

The Springs experienced similar commercial real estate woes in the late 1980s and early 1990s. The difference, however, is that a federal government agency took control of many properties, sold them at fire sale prices and got them off the market, said commercial broker Steve Bach of Bach Real Estate Partners.

Now, even if lenders foreclose and return properties to the market at discount prices, some would-be buyers can’t obtain loans for their purchases. Likewise, federal regulators are telling financial institutions to shrink, not expand, their portfolio of commercial loans, Bach said. The result could be that such properties will remain in the hands of lenders for a while.

“It’s like the perfect storm of negative conditions,” he said.

A Gazette study of Public Trustee records found that several small shopping centers, large chunks of undeveloped residential and commercial land and a handful of apartment complexes were among commercial properties in foreclosure.

While office and industrial properties weren’t as common, they’re likely to follow, said Randy Dowis, a broker with NAI Highland Commercial Group in Colorado Springs.

Apartments? A recent decrease in local vacancy rates, due largely to an influx of Fort Carson soldiers, could keep more apartment complexes from defaulting, said Doug Carter of Sperry Van Ness.

Do such commercial woes matter to anybody other that property owners and investors? They could.
Office or shopping center tenants might be unhappy if they start seeing dying grass or shabby landscaping because their financially troubled commercial building owner is putting off maintenance, Dowis said.

Or, a patient heading into a doctor or dentist’s office might notice chipped paint or a bathroom that’s not as clean, he said.

“It depends on how observant you are,” Dowis said.

The downturn is good for investors because discounted properties will be available for sale — assuming a buyer has cash or can obtain a loan, he said.

But property owners who aren’t in trouble should think twice about trying to sell. Falling values mean that owners who can wait out the downturn should hold onto their properties.

“If you don’t need to sell it, forget about it,” Justus said. “We’re in this for what could easily be another two years.”
—
Contact the writer at 636-0228.

TROUBLED TIMES FOR COMMERCIAL REAL ESTATE
The Pikes Peak region’s commercial real estate market, like single-family housing, is experiencing financial woes. Examples of commercial properties in foreclosure last year include:
• Morley-Howard Investments, which includes Colorado Springs developer Jim Morley and partner Paul Howard, went into foreclosure in August on its purchase of 2,300 acres northeast of Vollmer and Shoup roads in unincorporated Black Forest, where the upscale Sanctuary in the Pines neighborhood was planned. Morley-Howard owes $25.2 million on a $29 million loan for the property; the amount was the biggest in recent memory in the Colorado Springs area. An El Paso County Public Trustee’s sale of the property has been delayed several times; the next sale is scheduled for Wednesday.
• The Shops at Woodmen Hills, a strip center along McLaughlin Road in unincorporated Falcon, was one of several small shopping centers to default last year. The property’s Southern California owner had an unpaid balance of nearly $3 million on a $3.1 million loan. The shopping center went into foreclosure in July; it was sold at a Public Trustee’s auction in November.
• Five small shopping centers whose owners were a series of limited liability companies apparently controlled by Springs developer Jannie Richardson were sold in January after foreclosure filings in September. Unpaid loan balances totaled nearly $8.8 million. The SRKO Family Limited Partnership, developer of the partially finished Colorado Crossing mixed-use project in northern Colorado Springs and of which Richardson is listed as manager, has filed for bankruptcy.
• The Timberlane Apartments southeast of Academy Boulevard and Airport Road went into foreclosure in September with a loan balance of $5.4 million; it’s scheduled for sale March 24. The Park Terrace Apartments on the city’s northwest side, where $3.8 million was owed, were sold in December. California owners controlled both properties.
• The Space Village Mini Warehouse, east of U.S. Highway 24 and Peterson Road, was foreclosed on in October and had a loan balance of $2.3 million. It was sold Wednesday at a Public Trustee’s Auction.
Sources: Gazette research; El Paso County Public Trustee’s office; El Paso County Assessor’s office