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By Nathan Peck | MiBiz
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KALAMAZOO — Commercial real estate, long a safe bet for investors, was among the bogeymen of the financial crisis and recession.

There is a sense that the industry has reached bottom and things may be starting to look up. Investors are starting to take interest in bank-owned and distressed properties and credit is starting to loosen, but the industry is climbing out of a deep hole.

Perry Wolfe, community president for Chemical Bank in Kalamazoo, and Patrick Lennon, partner in Honigman Miller Schwartz and Cohn LLP’s Real Estate Department heading the practice in Kalamazoo, recently sat down with the MiBiz editorial board for an exclusive interview.

MiBiz: How would you characterize the state of the commercial real estate industry today?

Lennon: We had a couple of not-so great years, but things are on the upswing. There seems to be more available in the form of financing, so I think that things are on the rise in general. There is definitely more tenant activity, more leasing activity, and that leads to buildings with stronger financial performance — which leads to sales and refinancing, (which) are really the fuel that makes the projects go.

Wolfe: We are seeing stabilization in rents. There are not as many concessions that have to be made. Values — we’re still seeing some slipping a little bit, but there is nowhere near the slide we had in the previous two years. We are starting to see those values come in stronger.

The real difference I see is people are out kicking tires again, they are looking at projects, they’re considering projects and they’re talking with their banks about projects. In the continuum of risk, there are those of us who have no risk and those who are willing to take unlimited risk. For the past two years, no one was doing anything. The other side of the continuum has said we have to do something.

People start looking at the economics and it’s starting to make sense. For a long time, you couldn’t make the math work.

MiBiz: What does the market look like for distressed properties and obsolete manufacturing facilities?

Lennon: I think one of the differences you are seeing is (that with) some of those properties that are extremely distressed, there is activity. There is interest in those and there seems to be money to buy them. What that tells us is that we’ve reached the bottom. Some of the properties that no one was even looking at are now generating offers and seeing leasing activity — those will be your off-location type office projects, tired apartment projects with high vacancies, bank REOs. There really wasn’t … financing available for those types of properties for a couple of years, … and it’s a reason why things were stagnant for a while. Now there seem to be loans for those and interest.

Patrick Lennon (left), an attorney with Honigman, and Perry Wolfe (right), community president for Chemical Bank, see the commercial real estate market starting to turn a corner. PHOTOS: JOE BOOMGAARD

Industrial is an entirely different category. It really is not as tenant-driven. It is more operator driven, Most industrial properties, at least the ones we deal with, are owned and operated. If you have production needs as a large industrial company, you need to expand your facility and make sure they are operating. There isn’t as much investment activity as there is in office, apartment and retail, so it is a different analysis.

Wolfe: In the uptick we’re seeing, I haven’t seen a really big uptick in manufacturing. Those manufacturers that have survived the last three years are those that had strong balance sheets, they had liquidity, they had dry powder to fall back on to get them through this period.

Those that didn’t — that were in those manufacturing facilities ­— may be gone. And now those facilities, which at times can be pretty specific in purpose, (could be on the market). We just haven’t seen the uptick in new manufacturing in this market to absorb those unstablized properties. You relate that to office or housing, the barriers to entry in getting into those as an owner of real estate are lower than for an industrial piece of property that has specific uses, specific needs. If you’re going to rent space for an office, you don’t need 20-foot, clear-span ceilings that you’ll have to heat.

MiBiz: To what extent are there still concerns over a “shadow inventory?”

Lennon: My perception of that is that thought is largely inaccurate. The way distressed properties are defined is overly broad. A lot of that is a function of some of the big lenders and the way they’ve defined certain properties as distressed. Historically, an investor would define a property as distressed as one where there is insufficient income to make debt service payments.

In the more regulated banking world, and in conduit loans with certain performance covenants that properties have to maintain, a property can be defined as distressed even though it is making its payments and even though there is an owner and guarantor. There is a concern that there are numerous distressed properties that aren’t really on the market or known about. If you define properties that maybe aren’t meeting their debt service coverage ratios as distressed, that is true. But the landlords aren’t going to sell them, they are making their payments and they are able to cover their debt if there was a real problem.

I think that it is a little inaccurate because I think the class of property that is characterized as distressed may be overly broad. I look at distressed as ‘We can’t make our payment and we’re going to lose the property.’ There are fewer of those than there used to be.

Wolfe: There are some banks who have decided to get out of certain property types and regions, as they relate to Michigan and West Michigan. You could be a good owner-operator and are able to make your payments, but the bank decides they don’t want to have you anymore. Does that make you distressed because they moved you into their category of a distressed property? In their mind, they don’t want to be there. You may be able to pay for every dollar of debt with a dollar of cash flow. You may have just enough, but some of the larger banks and non-local banks say that is not enough.

Does that make it a distressed property? I would argue no. You go back, you look at the owner and the history of the company and the fact that anyone has had trouble the last two years shouldn’t be a shock to anybody. I see our job as bankers … to look at that and see who are the people who are going to work hard and continuing to work hard, are continuing to find a market, have a niche and will work through this. We’re going to work with them.

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TAGS:

• chemical bank
• commercial real estate
• honigman miller schwartz and cohn
• kalamazoo
• patrick lennon
• perry wolfe