Shawn Massey, CCIM, SCLS

Distressed Market Still Distressed by Steve Bergsman

Note:  I am fortunate to have my friend Steve Bergsman as my guest blogger again this week.  Thank you Steve!

             A number of dealmakers have been able to take advantage of more distressed properties coming into the market, but the sluice gates still haven’t fully opened and the volume has been very spotty.

            The biggest problem has been the banks, which haven’t had the most realistic view of the market. The banks look at the appraisals, which are usually high, and it takes time to ferret through to where the reality is. When the banks have taken their hits, they become sellers.

            Despite the progress in the distress marketplace, potential buyers still haven’t been bullish on distressed properties coming to market. The percentage of distressed retail sales won’t increase by much in 2012 over the year before.

            Extend-and-pretend really acted as a supply control. An artificially low level of supply is providing a lift to pricing. This also means that resolution of these loans and clearing out bank balance sheets is going to go on longer.

            This year has seen a slow beginning to extend-and-pretend reductions, but the question remains, do you want to solve the problem quickly and deal with a lot of pain all at once or do you pull the band-aid off slowly.

Commercial banks are finally profitable again and are now in a better position to take some losses.

While that may be true, the banks also operate smarter, having learned from the Resolution Trust Corporation days of the early 1990s about returning real estate values, and are decidedly more patient about getting rid of assets. Still, a lot of loan modifications were done in the trough of the market, 2009 and 2010, and many were short-term in nature, so lenders are coming to a moment of truth. Those properties have to be dealt with, and that might include sales of the property or the notes.

It’s not just the lenders that are starting to put distressed real estate into play, but the servicers for the commercial mortgage-backed securities bondholders as well.

What we are seeing now is that some of the CMBS players that have had successes getting extensions, because there is a little more competence in the market, are saying, “if you are going to extend, you better bring additional money to the table or we are not going to extend and we are going to go through the process of gaining control of the asset.”

Then there is the special case for the smaller properties.

Most of the servicers are on record as saying they want to dump all their under-$5 million loans on REO properties. They don’ feel there is enough upside for them to hang on to those loans. Most of the velocity in the marketplace is in the under-$5 million property or loan.

A company that worked with a lot of banks noted the past year was certainly busier. The company did short sales, REO deals and sold notes. However, the most common sale had been the traditional sale. Distressed deals made up a small percentage of this company’s business, maybe 25% at the most. That, the company stated, won’t change in the near term.

 Steve Bergsman is a well-known writer on the subject of real estate. His latest book, Growing Up Levittown: In a Time of Conformity, Controversy and Cultural Crisis, is now available at Amazon.

I hope you will check out future weekly commentary at

www.RetailRocksintheMidsouth.com.   If you enjoy the commentary please subscribe online.

Cheers,

Shawn

Shawn Massey, CCIM, SCLS is a partner with The Shopping Center Group a 3rd party retail real estate advisory firm in their Memphis office, an adjunct professor in the graduate real estate program at The University of Memphis and a co-founder and Chairman of the Board for the Memphis Business Academy charter schools (K-12th grade) in the Frayser area of Memphis.  

For all your retail real estate needs (tenant representation, landlord representation and property, investment & land sales) I hope that you will choose The Shopping Center Group and me to represent you and your business.  We understand that representation is a privilege and that you have a choice!

The opinions expressed in this post are entirely my own.  They should not be considered the opinion of The Shopping Center Group, LLC in which I am associated.

 

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