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Commercial real estate challenges continue

By Nathan Peck | MiBiz
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WEST MICHIGAN — Now is a great time to buy real estate with prices at their lowest point in years.

Looking to sell? Well, er…how about the heat this summer?

The slow recovery from the Great Recession, persistently high unemployment and reduced tolerance for risk from lenders are slowing the real estate markets, say many within the industry. Combined with commercial property owners and homeowners feeling the pinch from the recession, real estate brokers are seeing a split in the marketplace in the form of activity in the best and worst segments of the market.

“First-class properties are starting to sell. We are seeing beautiful property moves and good demand there. If you have office space in the suburbs, or worse yet, a retail strip center, there is a lot of supply. What we are seeing, a quote we’ve been using internally, is that it is all trophies and train wrecks that are selling,” said Derek Hunderman, VP and managing partner of Colliers International in Grand Rapids. “On the train wrecks side, there is no surprise that there are properties in trouble, owners who can’t afford their mortgages, can’t get financing, and whose business has declined. Those train wrecks have been selling quite briskly.”

It is the middle-of-the-road properties — the retail strip malls and office parks ­— where the absorption of current supply is expected to take years, not months. In one of the worst performing segments, commercial office space for lease between 1,500 and 3,000 square feet, Colliers had 638 properties available as of May, the last data currently available. At the real estate market’s peak, Colliers was finding tenants for between 85 and 104 of those properties. In 2009, there were just 36 leases. In 2010, there have been 18.

“In some segments, the supply is very deep, but not all areas. For large manufacturing companies, the supply of suitable facilities is very, very slim. You are seeing pretty tight supply there. It creates an interesting market dynamic,” Hunderman said.

Those deals that do happen do so with much more work than in pre-recession times, many said, requiring much more contact with lenders and frequently ­(SNDA) agreements. The agreement details how and when the rights of tenants will be subordinate to the rights of lenders or, sometimes at lender’s option, senior to the rights of lenders. The non-disturbance portion of the agreement assures tenants that their rights to their premises will be preserved on specified conditions within their control, even if the landlord defaults on a loan and the lender forecloses.

Real estate broker Rick DeKam, managing partner of MidWest Realty Group, points to a Fortune 500 insurer that wanted to lease space in one of his properties in Kalamazoo earlier this year. The bank holding the mortgage on the property wanted to see the terms of the lease and have the tenant sign a SNDA agreement, the first time he had to deal with that level of bank involvement in a lease agreement. Banks are getting more closely involved with lessees to ensure that tenants’ rent will cover the landlord’s debt. The tenant initially balked at the requirement, but eventually gave in.
“Tenants at this point are becoming desensitized to it,” DeKam told MiBiz.

Hunderman agrees, and said he has had to draw more personnel into the mix when working on a transaction. Colliers changed its strategy, frequently bringing in experts in lending and appraisal and tax appeals.

“You need a larger, more developed team just because the market demands it. The transactions we are seeing in the marketplace are taking place with a tremendous amount of effort,” he said. “It is a double-edged sword, oftentimes it takes some creativity and tenacity, and that (involvement) alone can kill deals. If you have a buyer and seller who want to do a deal, any hiccup in the past you could have worked through, oftentimes now it is a show-stopper.”

As Americans feel continued unease about their job prospects and more properties become distressed and enter foreclosure, property values have tumbled. Foreclosures account for 37 percent of the residential properties on the market, according to RealtyTrac, an online company that tracks foreclosures nationwide. The average sale price of a home in Southwest Michigan has dropped 24 percent since 2006, the crest of the real estate wave, and now sits at $123,000 — the lowest point since 1998, said Tom Seelbinder, a realtor with RE/MAX Advantage in Kalamazoo with more than 30 years experience. Government programs designed to keep homeowners out of foreclosure have had mixed results, and in many cases it only delays the inevitable.

“We are seeing that only 1 in 10 people going for loan modification actually get it. This is another case of the unintended consequences of government intervention,” Seelbinder said. “Look at unemployment. Until we get on a better course and see growth in the private sector, things are going to be tough.”

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TAGS:

• colliers international
• derek hunderman
• grand rapids
• kalamazoo
• midwest realty group
• re/max advantage
• real estate
• rick dekam
• tom seelbinder
• west michigan