Distressed assets still rule commercial real estate

If the current real estate cycle were a baseball game, Las Vegas would be in the fifth or sixth inning, a panel of analysts said Thursday evening at Spanish Trail Country Club.

It's progressed from the third or fourth inning a year ago, said Brendan Keating, principal of The Equity Group who moderated a discussion on distressed real estate assets.

Keating said he saw a large increase in sales and lease transactions in 2010 compared with 2009. Still, the buzz in commercial real estate continues to be distressed assets and loan workouts.

Nevada was second only to New York in defaulted debt on commercial mortgage-backed securities, the broker said.

"People were comfortable coming to Vegas and putting their money down on distressed assets," Keating said. "You're seeing shopping centers trade at 60 percent to 80 percent off their value. Investors are able to revitalize them and sell them at $50 to $100 a square foot and 6 percent to 7 percent cap rate."

What's interesting is the number of offshore investors buying in Las Vegas, said Rick Myers, president of Thomas & Mack Development Group and consultant for Nevada State Bank.

"They're so different from the normal buyer profile," he said. "How do you qualify someone from China?"

Nevada State Bank sold about $120 million of distressed real estate since mid-2009, Myers said. Roughly 85 percent of it was land, though that's starting to change, he said. He's seeing fewer land transactions and more shopping centers in the $10 million range.

Attorney Mike Wixom of Las Vegas law firm Smith Larsen Wixom stunned the audience of about 40 real estate professionals when he cited 300 percent loan-to-value ratios on some bankrupt commercial properties.

"From the lender's perspective, it's how we underwrite the guarantor. They didn't look at the contingent liabilities and that came back to bite them in many ways," Wixom said. "As loans go south in unison, they go to the guarantors and find that they're way, way underwater."

A lot of pent-up demand for purchasing real estate is being held back because of the way loans are underwritten, Wixom said. He senses more activity is on the way, and said he was "shocked" to be doing another construction loan, something he thought he'd never see again in his lifetime.

Borrowers are starting to cooperate more with receivers, whose purpose is to protect the assets and act as a fiduciary agent for the court, said Larry Singer, vice president of Grubb & Ellis brokerage in Las Vegas. That means not letting the borrower walk away with money, not even charges for common area maintenance.

"Normally it's a war. Once it gets to the very end, it'll have to go to court. Now it takes a month to appoint a receiver. It used to be a week. In that one month, the borrower can do a lot of damage," Singer said.

Much has been reported in the past couple years about the wave of commercial defaults, the "other shoe" that was predicted to fall, and that could still happen, Singer said. But he's also seeing lenders and borrowers negotiate loan workouts much more aggressively.

"I'd say it's going to stay about the same for the next two to three years. It's hard to predict," he said.

The delinquency rate on commercial mortgage-backed securities has climbed to nearly 10 percent, about double what it was two years ago, with some $300 billion in commercial mortgage-backed securities debt expected to mature by 2017, said Charles Moore, senior vice president of investments for CB Richard Ellis.

His transaction volume dropped from about 25 to 30 in a typical year to just four in 2008 and about the same in 2009. He did 21 last year and his "pipeline is pretty full" today, Moore said.

"They were small deals in 2010, about $500,000 to $3 million, mostly FDIC-controlled assets," he said. "Investor demand overall has kicked up quite a bit. Most recently we had 28 offers on an industrial complex. People feel like we're at the bottom and they don't want to miss the train."

Gatski Commercial recently reported seven lease transactions, including a 60-month, $622,000 renewal amendment with DSI Las Vegas for 6,257 square feet of office space.

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.