Distressed Commercial Property Market Heating Up

The real estate market is gearing up for a deluge of distressed commercial properties.
Distressed Commercial Property Market Heating Up
Williamsburg, Brooklyn is one of the hotspots of commercial property trouble. (Cliff Jia/The Epoch Times)
Charlotte Cuthbertson
7/22/2009
Updated:
10/1/2015
<a><img src="https://www.theepochtimes.com/assets/uploads/2015/09/WilliamsburgBW_4899sm.jpg" alt="Williamsburg, Brooklyn is one of the hotspots of commercial property trouble.  (Cliff Jia/The Epoch Times)" title="Williamsburg, Brooklyn is one of the hotspots of commercial property trouble.  (Cliff Jia/The Epoch Times)" width="320" class="size-medium wp-image-1827214"/></a>
Williamsburg, Brooklyn is one of the hotspots of commercial property trouble.  (Cliff Jia/The Epoch Times)

NEW YORK—The real estate market is gearing up for a deluge of distressed commercial properties.
Slower than residential to reach a critical point due to their income-producing and multi-tenanted nature, the commercial real estate market took longer to sour.

Many properties are due for refinancing as the mortgages are shorter-term—5 to 10 years, as opposed to the typical 30-year residential loan.

During the first six months of 2009, Queens leads all New York counties with 40.7 percent of all foreclosure filings, according to RealtyTrac statistics. Brooklyn is second, with 29.1 percent of all filings. Matthew Baron, principal with the Simon Development Group, sees opportunities in the distressed market after “sitting on the sidelines” for the past eight months.

The Simon Development Group currently has a $300 million portfolio of 16 multi-family, mixed-use buildings mainly in Manhattan.

The defaults are coming for a couple of different reasons, Baron said, painting a bleak picture.

“One, is you have people that have debt that’s maturing, and you no longer have the ability to get the kind of leverage you used to get,” he said.

“If you are the owner that’s got [the] 5- or 10-year mortgage that’s expiring this year... Your rents are down, so the value of your building is less and the amount of debt it can support is less, and banks, on top of that, are willing to lend less today,” he added. “So you’ve got to come up with a significant equity check, and if you’re like anybody else, you’ve lost 40 percent of your money in the stock market crash...”

On the brighter side, lenders are looking for workouts, he said. In one case, the bank foreclosed on a large property but kept the buyer on as the management company.

The residential rental market is also down 15 to 20 percent, Baron said, but his current properties are almost vacancy-free—many are rent-stabilized with waiting lists.

“There is still great absorption if you adjust your pricing,” he said.

Developers who are in trouble are looking for ways to stay afloat. Stephan Butler was brought in to consult on a few projects that are not yet finished and heading for potential foreclosure—many are in Williamsburg.

Butler’s background is as a commercial construction manager with the Real Estate Group International as well as serving as a Fellow in Strategic Initiatives for New York State’s Metropolitan Transportation Authority.

“I am seen as a person who provides light at the end of the tunnel,” he said.

Butler “crashes the schedule” of construction, and looks for a quicker path to completion, and ultimately occupancy. The method is to find out the longest path for completion, then look at the relationships between work activities and activities that feed into that path, he said.

“If you had a few more days of labor, or additional labor, you can reduce the overall time of the project,” Butler said. One example is the wait for materials, for example, the time it takes for counter-tops from Italy to arrive could be months.

Is it better to pay $100,000 to quick ship rather than bear the wait-time cost? Butler asks. “Can additional money be spent to reduce the overall cost of the project?”

But recapturing months of construction time costs up-front brings its own difficulties to already-strapped developers.

“A lot of times developers have had to find alternative methods of funding, even selling their own personal assets to raise the money,” he said. Developers are also using equity to help.

The three projects Butler is currently working on are mixed-use, mid-sized developments of more than $20 million. New bank restrictions are creating a tougher environment for refinancing, with a higher percentage of units needing to be sold before a re-fi is granted, said Butler. On one of Butler’s projects they are completely changing the décor and converting the units to a rental project.

“[But] not all developers are able to hang on and complete the turnaround project—even though there’s a good plan in place,” he said. “Right now we are being successful, but not at the finish line yet.”
Butler expects his demand to grow over the next 18 months as banks become more aggressive about foreclosing.

But, “my first line of work is building these buildings from scratch – so I would rather see that,” he said.

Matthew Baron and Stephan Butler are panel speakers at next Wednesday’s Distressed Investing Leaders Forum in New York. www.goldennetworking.com