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The normally optimistic Rick DeKam of Midwest Realty Group has little to smile about now that he’s gotten a taste of the industry from all sides. PHOTO:  JOHN LACKO

By Nathan Peck | TransActions
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KALAMAZOO — Rick DeKam is typically an optimist, though you wouldn’t guess it recently.

Given the continued bad news coming from the real estate sector, the usually upbeat real estate broker is uncharacteristically dour of late. Sitting in his office along West Center Avenue, he is running between appointments working on helping banks deal with the difficult commercial real estate markets. He questions the optimism that has permeated the discussion of the economy. DeKam says that as far as commercial real estate is concerned, we’ve got a long way to go.

“I’ve read that maybe we’ve hit bottom, (but) as somebody in the trenches, I’m skeptical,” DeKam told TransActions. “I’m a sales guy and by nature not a pessimist, but I don’t see that. I’ve been asked to contribute to articles looking for reasons to be optimistic, (but) I just can’t do it.”

DeKam, a real estate broker and developer in his own right, has moved to the other side of the equation — helping banks deal with the rising numbers of troubled assets on their books. As the recovery continues its slow, painfully slow uptick, it is swallowing up developers who were overly leveraged in boom times, he said. DeKam’s business, Midwest Realty Group, has been increasingly involved in workouts between banks and borrowers and helping bring distressed properties to market.

“The bank work has given me a very interesting perspective. The media paints a picture where we tend to look at banks as bad guys. When the chips, are down they’ll take the borrower’s property right from beneath him,” DeKam said. “I’m the borrower, property manager and now consultant to banks — it provides me a unique, catbird perspective. When you look at the banks, it’s a tough situation.”

Banks are seeing growth in the number of loans in non-accrual status, or 90 days delinquent. While many focus on a bank’s real estate owned numbers — property that has reverted back to bank ownership — DeKam says the size of the non-accrual problem dwarfs that of the REO (sometimes called ORE) numbers on several orders of magnitude and poses a larger threat to the market as these are the property owners who are at risk of falling into foreclosure.

“We’re working as hard as we can on the bank-held property to resolve issues and have been so busy chasing these things around, we need to look at the nonaccrual loans,” DeKam said. When nonaccrual loans account for $600 million of a bank’s assets, compared to $80 million in REO property, “we can count on half of those loans will end up ORE. That’s the tidal wave that’s coming.”

Who’s at fault? There is plenty of blame to go around, including Fed policy that kept borrowing rates low to keep the building boom going. Banks let lending standards slip in the interest of grabbing more market share. Developers were looking to build with the least amount of skin in the game. Stepping back, DeKam realizes his part in the boom and bust.

“You have to ask if these banks are here because of the go-go years where they were all climbing over each other to make a crazier loan than before. It was a ‘get the money out the door’ mentality,” DeKam explained. “You had developers who were over extended. We really are all in this together. I really don’t see it being anyone’s fault other than the money started going faster and faster to get the deals done.”

As foreclosed properties have hit the market, the effect has been to undercut the rates existing property managers can charge on rents — sometimes on the order of 40 to 50 percent. As a result, tenants are understandably looking for rent relief from their landlords or breaking leases to lock into better lease terms in other properties.

“There is not any measurable demand out there. People are stealing customers from each other,” DeKam said. “Tenants want their piece of the discount pie. Tenants who were paying market rent from three years ago come and say they’re no longer paying this.”

DeKam points to frozen capital markets as an accurate indicator of the real estate economy. Many banks are taking a broad brush approach to the troubled market. When looking at comparable sales for appraisals, the prices reflect a market where nearly all the sales are of distressed properties. Commercial properties that once leased at $175 per square foot are now at $40 per square foot.

“We just saw an adjustment in the market we’ve never seen since the Great Depression,” he said. “On some level, they were very similar — in some ways this recession has been more severe than the early 80s. We’re not done deflating in my mind. That may be a micro-view on Michigan, but we are not out of this yet.”

“Capital markets have not unfrozen yet. If banks feel that there is a reasonable possibility that the market is not done deflating, they’re not willing to take on much more risk,” he said. “Demand just is not out there.”

The rules, he says, have changed. He’s advising clients with dry powder that are concerned about tumbling rents to take a defensive strategy and buy up troubled property in their markets — as a means of hedging their risk and putting a price floor on rents.

“The old rules no longer apply,” he said. “We are rewriting the rules of the market.”

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• kalamazoo
• midwest realty group
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• rick dekam