Investors are constantly asking me to show them some of the distressed assets we hear so much about. Fact is, lots more people are looking for distressed assets than there is much of this product on the market…..WHY?
That’s the subject of a recent on-the-mark blog article by New York investment broker Robert Knakal. Let me share some FACTS from the blog post:
• The banks have been very, VERY busy dealing with balance sheet issues, regulators and the government’s TARP initiatives which has kept them from focusing on defaulted loans. That along with what one industry participant recently characterized as banks’ preference to “Extend & Pretend” on loans that are either due or out of regulatory compliance is simply forestalling the inevitable.
• Those banks have been staffing up their workout divisions and analyzing troubled loans to deal with the accumulating pile of loans that need attention. The pipeline of distressed properties is chock full and only beginning to trickle into the market.
• Billions of dollars of distressed assets will begin to come onto the market beginning NOW in the third quarter of this year, unlike anything we have seen since the early 1990s.
• In addition to ‘Opportunity Funds’ being formed, a lot of individuals who have made their money in places other than real estate are posturing to buy, as are a significant number of foreign interests. They see pricing that we have not seen since the mid-1980s.
• These distressed assets exist because prices that were too high allowed leverage to become available and real estate fundamentals have deteriorated. We can expect them to be a significant part of our marketplace for years to come as mortgage maturities are spread over time. Opportunities will allow both lenders and investors to wind up winning in the marketplace.
And, What About Distressed Assets In Richmond?
Ahhhh, the second most asked question I hear. Clearly, national trends and statistics have little to do with local market dynamics. Florida and Las Vegas residential markets look little like our Richmond homes market and the same can be said for commercial investment properties…up to a point.
Portfolio buyers of shopping centers, apartment buildings and office buildings are “stressed” by debt that in many cases is cross-collateralized (lumped together as a single-credit for the loan). Some of those assets are in our markets as well as spread across other states and we will see some “triage” as lenders and borrowers seek to shed the weaker assets and improve the credit.
Retail in Richmond has experienced a building boom in the past three years unlike anything ever in our history. Local job losses from relocating and failed companies along with the general “hunkering down” in discretionary spending are taking their tolls on retail receipts. That stress will begin to have a negative effect on occupancies in shopping centers and we will see some foreclosures as we move into the fourth quarter of this year.
Office properties have already seen serious vacancies and asking rents for prime properties are now competing with Class B locations for tenants. Expect to see more.
Apartments appear to be healthy, but with continued government loan availabilities, this sector will experience new building that will exceed anything projected for either population growth or new family formations in the Richmond metro market. Expect to see some serious vacancy starting as early as next year in our market.
Industrial space is beginning to feel the pinch of reduced inventories and a slowdown in the consumer goods distribution pipeline. While nothing like port cities such as the Tidewater Region are experiencing, we can expect this to continue until consumer confidence brings people back to shop at someplace besides Wal-Mart.
So, if your taste runs to distressed assets, first expect to find ‘buys’ in the retail sector. Some big boxes that were purchased on the basis of the tenant credit like Circuit City will begin stay vacant until owners accept lower rents or liquidate to resolve debt. Unanchored shopping centers will suffer tenant losses to grocery-anchored locations since consumers “still have to eat” and will continue to visit those locations.
Stay tuned as we will be updating these articles with specific transaction information that you can use to measure the targets you might be considering for acquisition.