From sddt.com:
A new report concludes the level of commercial loan defaults accelerating, but whether that means a surge of commercial foreclosures in San Diego depends on who is assessing the data. Nationally, the Deutsche Bank report noted more than $2 trillion worth of commercial paper is set to mature between now and 2013, and as much as $450 billion would not qualify for refinancing under current criteria.
“This downturn may well exceed 2001-2003 when cumulative default rates reached nearly 25 percent,” Deutsche Bank stated.
The bank said the national commercial delinquency rate reached 4.1 percent as of the end of June. While year-to-year figures weren’t immediately available, that rate was some 3.5 times higher than December.
The bank identified some 2,158 delinquent commercial mortgages representing $27.9 billion in instruments nationally as of the end of June.
The commercial foreclosure activity has been robust enough here that Del Mar Heights-based Trigild, a receiver and distressed property specialist, has expanded its headquarters to accommodate more project management and accounting personnel.
Bill Hoffman, Trigild president and CEO, said in a prepared statement that his company’s portfolio of properties has grown significantly over the last year, and now represents more than $2 billion in defaulted commercial loans. These include the hospitality, commercial office and retail, multifamily and unfinished development sectors.
Hoffman doesn’t expect the distressed commercial property business to slow down.
“Tight credit markets will continue to hinder investors’ ability to pay off loans, and as a result, the rate of commercial defaults is soon expected to top 5 percent,” he said. “With this in mind, we are anticipating a dramatic influx of business in the coming months, and are growing our firm and service to accommodate new clients and employees.”
Jamie Dick, a Newmark Realty Capital Inc. senior vice president, suggests that while commercial foreclosures, particularly when they involve payment defaults, are inevitable in many cases, commercial lenders who are faced with loan maturity defaults — a big balloon payment at the end _ are likely to be more accommodating.
“If the lender forecloses, what are they going to do with it?” Dick said. “There’s a saying going around. It’s called ‘extend and pretend.’ They extend hoping that things will be better when the loan matures again. We are seeing a lot of banks work with borrowers.”
However, Dick said there is a shrinking pool of lenders willing to refinance, meaning some will foreclose rather than attempt a workout. With the commercial mortgage backed securities market effectively dead, finding lenders who will loan at all has become increasingly problematic.
“I’d say that 2007 was the last normal year as far as the CMBS market goes. If you looked at a pie chart you’d see that up until then, CMBS was 65 percent of the market, so you can imagine all of that disappearing,” Dick said.
Dick said that CMBS was a $19 billion market in 1999, but reached $230 billion by 2007.
“And wait until 2017 when all the loans from 2007 will be coming due.”
Some loans are still available. Dick noted that lenders have shown a willingness to provide as much as $5 million, but with very few exceptions, getting access to more capital than that has been extremely difficult. When asked when capital will begin to flow more easily, Dick said it could be years from now.
“I think it’s like an icicle. It will melt, but it will be one drop at a time,” Dick said.
While there are pockets of overbuilding such as the Carlsbad and Interstate 15 office markets and the Otay Mesa industrial market, Dick said San Diego generally doesn’t have the surplus of space, currently the case in markets such as Phoenix and Las Vegas.
“Mainly, we just ran out of places to build. For example, we didn’t have all that land to build shopping centers,” he said. Dick said although some centers are hurting with the loss of some major tenants such as Circuit City, the retail vacancy is 6 percent at most – still a very healthy figure.
“San Diego will recover very quickly,” Dick said.
Doesn’t this qualify for the psycho-babble tag, especially given the sections you bolded? 😉
Yeah, I was on the fence.
I added the tag, just for Dick’s last line – he didn’t really mention WHEN San Diego would recover very quickly – 2050?
Commercial is an interesting ball of wax. I’ve leased my fair share of CRE for my business over the past few years, and I don’t think it can recover easily.
For one thing, while there are at least 50 people who comment on this blog every day who have the ability to buy a house here but are just waiting for prices to come down, I don’t see businesses complaining about price — they’re just not interested in office space at all.
San Diego has a huge overhang of empty office parks, but the business owners I see are following these trends:
1) Hiring part-time people so they can share offices or not have offices at all
2) Hiring overseas folks at all levels of expertise
3) “Insourcing” to the Midwest/South and other cheaper places to live in the U.S./Canada
4) Investing in technology so the business can expand without hiring
And some very small businesses have moved back into homes — which may account for some small part of the demand for rental houses here in N. County (or even owner-occupied, as the owner calculates the “savings” of not renting an office.)
Office space occupancy at all levels seems to be on a downward trend.
-Erica
Hmm… Last time I heard a large portion of the San Diego economy was in the service sector. Without house equity making everyone “rich” I’d have to question commercial properties ability to keep prices high enough to pay off the lenders.
I see a LOT of vacant office space around where I work in Carlsbad. I have no idea whether this is the norm, as I’m new to the area.
Maybe my company can lease some of it and build me a fancy new office; like Erica said, I don’t see a bunch of companies swooping in to pick up more space.
Jim,
Glad you changed your mind from your previous stance (see below) and decided to post information about CRE. This is really good information for readers to understand and consider as to the potential outcome in our economy in the near term. Love your blog keep up the good work (I mean it, you do a good service to the public).
35.Readers are tired of the negative general carpet-bombing heard a million times before, and/or the guarantees made with the intent to insult people’s intelligence.
Jim the Realtor | July 28th, 2009 at 7:51 am
There is no greater lie in real estate be it commercial or residential than “we are running out of new building capacity.”
Up in hear in sacramento there is oodles of commercial space available.Who is going to take over all the old mervyns, circuit city etc.I wonder how many old mervyns execs made it over to kohls?Seems like these companies reinvent themselves and change thier names every ten years.They go bankrupt and screw the shareholders and continue business in a new name.the fleecing of america.
I spend the better part of the day in La Jolla (850 and La Jolla Village Dr). There are many vacant office spaces (big buildings) even one with a entry roundabout that seems like it never gets used. Some companies have moved out of DT San Diego to relocate in this part of La Jolla however.
I love it. “Just wait till 2017” Oh geez.
Information that might be eye opening would be how much of that vacant space is due to business which is still alive, but has moved out of California.
I disagree that San Diego county ran out of land and therefore doesn’t have shopping centers. What I think is much more likely is that some large retail companies find it is extremely difficult to business with SD county. Their demographics probably also point to a much poorer average consumer than the other two cities mentioned.
With retail space, it is true, San Diego does NOT have alot of NEW product to absorb. In fact, the largest project in the whole county to come online in 2009 was 123,000sf in Bressi Ranch–that is a small amount compared to other cities. Here, we really only need to re-absorb the recently vacated spaces–the small ones, especially built-out restaurants, are a no-brainer–they are already getting re-let. The big-box stuff will take a little time, but 6% is hardly panic mode.