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Growth of distressed commercial properties slows, hits $17.6 billion

The number of commercial properties in distress in the Las Vegas area grew in the fourth quarter — but at a slower pace.

And analysts suggest a wave of commercial foreclosures may not materialize — or at least will be pushed further into the future.

A report on distressed commercial real estate released in December by New York-based Real Capital Analytics, a research and consulting firm, showed Las Vegas held the No. 1 spot in the nation with 37 percent of its commercial properties in distress, up from 34 percent Oct. 1.

The report showed $17.6 billion in properties were distressed. That means the loans are in default, have been modified or restructured or the property has been foreclosed upon or the ownership group is in bankruptcy.

It included office, industrial, hotels, retail, apartments and developments under construction.

The number of distressed properties stood at $9.2 billion in April, but grew significantly over the summer with the Chapter 11 bankruptcy filing of Station Casinos Inc., said Jessica Ruderman, a senior analyst at Real Capital Analytics.

The World Market Center I and II with 2.5 million square feet in downtown Las Vegas have also fallen into the distressed category, Real Capital reported.

Although its loan has been moved into special servicing, the World Market Center has insisted it’s not in default on the mortgage.

A significant property added to the troubled list recently was both phases of The District at Green Valley Ranch, a mixed-use development in Henderson owned by American Nevada Company.

Bruce Deifik, president of The Greenspun Corporation, parent company of American Nevada, said moving The District loan into default was a strategic decision to bring the lenders and other parties to the table to restructure the debt.

“You have to go to a certain point to get anybody to listen,” Deifik said. “We are hopeful we are going to get this worked out in the first quarter of 2010. This particular asset doesn’t have an impact on The Greenspun Corporation or any other assets.”

The loan issue doesn’t affect operations at The District, and American Nevada and The Greenspun Corporation are committed to maintaining the development at the highest level, Deifik said.

Cash flow is down at The District because leases are based on sales, which have been affected by the economy, Deifik said. The occupancy rate is 93 percent in the first phase and 75 percent to 78 percent in the second phase, he said.

The second-phase vacancy rate was affected by the closure of 13,000 square feet of office space belonging to the closed Silver State Bank, Deifik said.

In Business Las Vegas is also part of The Greenspun Corporation.

Overall, banks don’t seem to be in a big hurry to foreclose on troubled properties and even resorts in bankruptcy have a chance of emerging with reduced debt levels that will get them off the troubled list, Ruderman said.

“I think the rate is going to slow down,” Ruderman said. “It’s not going to increase as much as it has since (the summer). I think lenders are trying to work them out so they don’t become distressed. The correction (in commercial real estate) may not happen.”

This is because federal banking regulators are encouraging loan extensions and restructurings that will curb defaults, she said.

Those properties that won’t be able to stave off foreclosure are those not generating any cash, including broken developments, vacant buildings and land, Ruderman said.

Kevin Higgins, senior vice president of Voit Commercial Brokerage, said it’s clear that lenders have been holding off on foreclosing and working with owners to modify loans.

“The federal government is letting them do that,” Higgins said. “In the past, that would not happen. If it takes the normal course, it should get worse before it gets better. The unknown is how much the lenders and institutions are going to keep trying to delay or extend, which I don’t think helps anybody.”

If lenders keep extending loans, all that will do is push the problem down the road instead of letting the system cleanse itself by the end of 2010, Higgins said.

In the commercial market, the economic slowdown has stalled projects and prevented developers from finding tenants for their buildings. Vacancy rates are at record levels for office, industrial and retail and rents continue to decline. Many landlords are struggling to generate revenue to pay what is required on their loans.

“All it does is delay it,” Higgins said. “The reality of what’s happening has to hit. I don’t think you can recover to any great deal and get through this without a little bit of pain.”

The economic recovery must be driven by new jobs and business opportunities and traditionally residential and commercial real estate have been a big part of that, Higgins said. Commercial real estate locally currently is stagnant with no development and few transactions because the prices are artificially high.

Higgins said many investors are waiting to gobble up the commercial properties — but they aren’t going to pay inflated prices and are frustrated at what’s happening.

Selling properties for what the market determines them to be worth would be a boon for contractors, architects, engineers, real estate brokers, money managers and others who have a stake in real estate and fixing up buildings, Higgins said. That would create jobs and stimulate the economy.

“Everyone wins then,” Higgins said. “It creates jobs and businesses go in there. Right now, without those opportunities, everybody is on the sideline.

“It is stagnant. There is no movement and I think that depresses the market further because there is no reality.”

Analysts suggest the government wants the commercial market to avoid what happened to the residential market, which by some measures collapsed in Las Vegas, and keep the economy stable for now.

Dave Sundaram, a partner with Odyssey Real Estate Capital in Las Vegas, said the topic came up in early December during a Bank of America conference in Las Vegas. The prevailing view is that if lenders had to sell troubled commercial assets, it would put them all out of business based on federal banking regulations. Federal regulators aren’t holding them to the rules at this time, he said.

Mortgages are being modified to get owners to pay what they can but with that income trickling into the bank, lenders aren’t in a position to extend credit and put money into real estate, Sundaram said.

“The solution is to let them go under and let assets clear at auction and have new capital come in to capitalize the banks,” Sundaram said. “The correction needs to take place. The damage is already done to the economy, and I think when credit starts loosening up, the economy will get going again.”

Sundaram said there isn’t the political will to allow that to happen because it would be an admission of failure.

“This administration doesn’t want any more bad news right now,” he said.

The breakdown in $17.6 billion in properties listed as under distress locally includes $471 million in office, $705 million in industrial, $2 billion in retail, $1 billion in apartments, $8.5 billion in hotels, $4.7 billion in development and $86 million in other commercial assets.

CORRECTION: The Jan. 1 to 7 issue of In Business Las Vegas and the online version of this story was incorrect in reporting Lake Mead Crossing, a 400,000-square-foot retail center in Henderson was in default on its loan. The center is not in default. Instead, an adjacent property on West Lake Mead Parkway, a 400,000 square-foot development site owned by Southland RDS is the one in default, according to Real Capital Analytics. In Business Las Vegas regrets the error. | (January 6, 2010)

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