Las Vegas Sun

September 21, 2019

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Real estate:

Las Vegas braces for commercial foreclosures


Steve Marcus

A view of the southwest Las Vegas Valley. Analysts say that high commercial real estate vacancy rates will contribute to lenders foreclosing on many properties. The southwest valley has the highest office vacancy rate at 25 percent.

A tsunami of commercial real estate foreclosures is on the horizon and is threatening banks and undermining developers who are already struggling with high vacancy rates.

It’s another looming blow for many Southern Nevada banks that are sweeping up after the financial wave of the residential real estate bust. Since the first of the year, a growing number of developers of offices, industrial space and retail centers are in default and face foreclosure, according to local real estate analysts.

New York-based Real Capital Analytics’ recent report ranked Las Vegas second behind New York and ahead of Los Angeles when it comes to troubled commercial properties. The value of troubled loans has grown from $4.7 billion in early 2008 to $6.4 billion, said Jessica Ruderman, a senior market analyst with the firm.

That’s 26 percent of the commercial market either in default or that has been foreclosed upon. That includes office, industrial, retail, hotels, casinos, condominiums and apartments, Ruderman said.

The problem is starting to gain national attention with suggestions that it could rival or exceed the commercial real estate slump in the early 1990s that was triggered by the savings and loan crisis. That helped drag the economy into a recession.

The Wall Street Journal reported banks could suffer as much as $250 billion in commercial real estate losses and 700 banks could fail because of that exposure.

That would add to the credit crunch and prompt calls for a greater government bailout of the banking industry.

“I think we are just getting our feet wet from a commercial standpoint,” said Kevin Higgins, senior vice president of Voit Commercial, a brokerage firm. “We are not even at our ankles yet. I think the general public for sure has no idea. People on Wall Street aren’t even talking about it publicly. This isn’t just the local banks’ money. This is big money, Wall Street money that lent on this stuff.”

In Las Vegas the downturn in the economy has forced companies to cut their workforces, downsize their space or even close their doors, thereby increasing commercial vacancy and putting pressure on landlords to cut rents. That further cuts into revenues needed to pay down debt on their projects.

“We’re probably going to see a wave of commercial foreclosures in Southern Nevada, probably the peak occurring in 2010 and probably heavily concentrated in the office market, followed by the unanchored retail market (smaller strip malls without anchor tenants),” said John Restrepo, principal of Restrepo Consulting who with other local analysts has sounded alarm bells about the problem for months. “The only question is, how big the wave.”

Once lenders take over the properties and sell them at what’s expected to be reduced prices, the new owners can set rents at lower rates to lure tenants. The stiff competition will hamper other developments that can’t afford to cut rents and thus create another wave of foreclosures, analysts said.

Brokerages are reporting record office vacancy rates as high as 20 percent to 25 percent, when including subleases. Retail vacancy is approaching 10 percent and in some cases has doubled over the past year. One brokerage reported industrial vacancies have surpassed 11 percent.

Consulting firm Applied Analysis reported a vacancy rate of 65 percent of offices opened in the past year, many in the southwest valley.

“We have seen it occur in the residential market, but we have yet to fully face it in the commercial,” said Jeremy Aguero, a principal at Applied Analysis.

Brian Gordon, another principal at Applied Analysis, said many of the foreclosures have been in the land market.

Some of the more prominent cases involve Lake Las Vegas and national lenders taking over Kyle Canyon Gateway from Focus Property Group and a group of homebuilders. The Cosmopolitan was foreclosed upon by Deutsche Bank.

Others that have had troubled loans include the Tropicana, Riveria, Inspirada Town Center land in Henderson, Streamline Tower condominiums, Hyatt Regency Lake Las Vegas, Ritz Carlton and One Queensridge Place condominiums, according to the firm.

“In office and retail, we have only seen a modest amount, but we are going to see much more over the next several quarters,” Gordon said. “It will be prevalent by the end of 2009. It is going to draw down the overall average market price, and even those that are not facing foreclosure will face the impact by the bar set in the commercial market. It has the potential to create a very serious situation.”

As the vacancy rates increase, defaults are going to increase because loans were made with assumptions to pay off the debt, analysts said. Many lenders may be unwilling to refinance.

“We are seeing all the indications that lead to default,” said Michael Campbell, managing partner of Colliers International. “A lot of these past loans were predicated on growth and 100 percent occupancy and rent increases.”

That’s quite a contrast to more conservative loans in previous years that factored in some vacancy and not as high of rent growth, Campbell said.

Gearing up

Local banks are foreclosing on more properties than before.

Of the 19 Las Vegas-based banks reporting to the Federal Deposit Insurance Corp., four reported foreclosures in commercial real estate at the end of 2008. Together the banks had $33.3 million in commercial real estate foreclosures. The previous two years, none of the banks reported foreclosures in commercial real estate.

This adds stress to banks’ balance sheets, especially if liquidity and capital are less than the problem assets, such as real estate loans not being repaid.

Commercial loans generally aren’t packaged and sold in bundles to investment groups, but are held onto by the bank with the loan.

Brokerages have reported fielding calls from banks on their plans to foreclose on properties and need of assistance in managing and selling them.

In response, brokerages have developed asset recovery teams. All sorts of specialties are going to be needed once the banks start inheriting this (foreclosed) real estate, Restrepo said.

Higgins said most of the commercial foreclosures have been smaller projects and one-tenant buildings. But the next wave of foreclosures will be entire complexes of industrial and office buildings where developers couldn’t sell or lease them. Some could start to happen by May or June, he said.

“You are just starting to see the notices of default come across,” Higgins said. “I don’t think anyone has their hands around it. Title companies send us a notice of default, and you see them progressively getting larger and larger. Right now, with a notice of default, you are 90 to 120 days out from it potentially being taken back. Everyone is going to do everything they can in that 90 to 120 days to not let that happen.”

Banks are gearing up for that possibility. Some have an in-house real estate department, such as Bank of Nevada. CEO Bruce Hendricks said he has a team working to sell the bank’s foreclosed properties.

To prevent foreclosures, Bank of Nevada is also working with its borrowers for “alternative structures” to their loans, Hendricks said. In some cases, that means the borrower coming up with additional collateral to offset the falling appraisal value of the property, such as other real estate, to secure the loan and avoid losing the property.

As for what’s prompting the foreclosures, analysts said it depends on the property type. Commercial land is being foreclosed upon because there is nothing they can build on it and generate the income based on the price they paid for it. Getting a loan to construct something is next to impossible.

New office buildings have had trouble attracting tenants for the rents they must charge to repay their loans and the downturn in the economy has reduced the demand that was expected when it was built.

And from the standpoint of older recently acquired buildings that have tenants in them, the developer may have a loan coming due in the next year as tenants are moving out. They will be unable to get a new loan because the new lease rates won’t support that price.

Gordon said shopping centers that are candidates for foreclosure are those that lost their anchor tenant, such as a grocery store or electronics store, because those anchors constituted a significant share of the overall rent and were the draw for smaller tenants.

“I think what we’re seeing in the retail sector, cash flow is being affected by the owners of these retail centers,” Hendricks said. “Tenants continue to renegotiate the leases for cheaper space because of the stress their businesses are under. So, vacancies continue to rise in the retail area, too.”

Banks responding

Some banks, however, aren’t giving developers more time to resolve their problems. The reason: Bankers can be handcuffed to the problem assets for a year or more if the property owner drags the foreclosure through Bankruptcy Court.

SouthwestUSA Bank CEO Patrick Wisman said his company anticipated the turning tide of commercial real estate and started foreclosing on properties if the borrowers were more than 30 days overdue.

“If they were 30 days past due, and they caught it up, then I’ll be fine, but if they were 30 days past due, we started foreclosure,” he said. “That would bring them to reality — are they going to be able to afford it or not?”

The reason for the bank’s aggressiveness is simple: The foreclosure process takes 120 days as dictated by Nevada law.

“From the time you recognize the problem till the time you actually get the property, the shortest amount of time is 120 days,” Wisman said. “If they file bankruptcy, it’s even longer. If somebody is trying to protect the property, they can drag it out for a year or more. You’re just sitting there with an asset on your books at whatever the value the new appraisal is for a year or more.”

SouthwestUSA already has brokers working every property it owns.

There are buyers out there — for the right price, Restrepo said.

“There is a lot of cash sitting on the sidelines,” he said. “They’re just waiting for it to get cheaper.”

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