Distressed CRE: It’s a Seller’s Market

As Distressed Property Prices Approach Market Values, Banks See Opportunities To Clear Out Inventories

It’s a sellers’ market for distressed commercial real estate and Taylor Burke, senior executive vice president and chief lending officer for the $2.62 billion Burke & Herbert Bank in Alexandria, VA, wants to move his inventory.

“I think this is a great time to buy distressed property, especially that which we are selling,” joked the Alexandria-based banker.

More seriously, though he says, the market is good for bad property right now.

“Banks should be cleaning out their inventory this spring,” said Burke. “I want to sell all my stuff now and I suspect that my conferees are ready to unload their REO now, too. There is finally some demand in outlying areas where most of our problems are located. Not just income-producing any more – even lots are selling at last. Builders need inventory. There are a lot of troubled suburban strip centers and offices everywhere. There has been a sea change in demand.”

But, therein also lies the weakness to the distressed investment market.

“I don’t see enough of a price spread to justify the risk of buying an empty or troubled building,” Burke said.

Luke Wood, partner in Haverwood Management, an opportunistic investment and management firm in Austin, TX, concurs.

“If you can find a good distressed deal at a ‘distressed’ price, buy it,” Wood said. “Good distressed assets are selling at market value (or above market value, depending on your opinion) at this point in the market recovery. Equity is looking for limited parking spots and we are seeing many distressed assets sell at non-distressed prices to optimistic buyers, eliminating the high returns sought after for distressed deals.”

Distress Sales By the Numbers

Distressed sales as a percentage of total commercial real estate property transactions have been on a declining trend since the start of 2011, according to CoStar Group data. Distressed property sales made up 20% of the dollar volume of deals in 2011 but just 11% of total property sales volume in 2012 as the number of nondistressed sales soared and the volume of distressed sales fell. There was $16 billion fewer distressed sales last year compared with 2011. At the same time total sales increased 26% from $255 billion to $322 billion.

The number of distressed sales decreased significantly in many core markets. Distressed sales in New York state were down $7.6 billion; down $3.1 billion in California and down $1.2 billion in Texas. Notable also was that distressed sales in Nevada were down $1.3 billion; where distressed sales made up almost entire volume of sales in 2011, they represented less than 30% last year.

However, different marfkets appear to be in different stages of the recovery cycle. For example, while total distressed property sales volume dropped year-to-year in Michigan, Nevada and Georgia, they still accounted for nearly 30% or more of all commercial property sales. But as distressed property sales plummeted in some states, they were increasing in other. Distressed sales were up more than $100 million in 2012 vs. 2011 in Maryland, South Carolina, Illinois, Colorado, Pennsylvania, New Jersey and Missouri.

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