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The recession negatively affected local, regional and national banks in Minneapolis/St. Paul and all commercial real estate product types. A wide range of real estate owned (REO) assets have sold in recent years, including single- and multi-tenant office buildings, industrial buildings, convenience stores, office condos, residential condos in bulk blocks, raw land, a campground, a historic warehouse, hotels — just about everything.
The biggest sector of bank REO property has been land, particularly residential development land. Nevertheless, the start of the housing recovery has seen a reduction in the inventory of individual residential lots coupled with increased interest in some of our larger residential development sites from national homebuilders.
While most of the insurance companies exited the Minneapolis commercial real estate market years ago, one of the national insurance companies did repossess a large Class A office property last year and sold it to a local investment group for a dollar more than the loan, which was $110 million. Zeller Realty Corp. of Chicago and Atlanta-based Invesco acquired the Fifth Street Towers from MetLife in April 2012. The buildings (two towers) were built in 1987 and 1988, and consist of roughly 1 million square feet.
The group that lost the property paid $186 million for the asset in 2007. In other words, the new owner acquired it for 59 percent of its earlier trading price, which is consistent with our estimate that properties on average are trading for 60 percent of values before the downturn.
Banks Shun Lowball Offers
The greatest concentration of commercial REO sales since the recession has occurred in the suburbs. While many properties sold for a fraction of their replacement value early in the sales cycle (which began in earnest in 2011, not 2009 or 2010), banks are no longer wasting time on lowball offers by bottom feeders.
Now that banks have stabilized their cash positions and cleared their books of some of their troubled assets, they have less pressure and motivation to sell at deep discounts. Some banks are more aggressive than others in moving nonperforming assets off their books, and it is highly situational.
Value-add buyers are in the market, but they want to understand the market strategy before they act, particularly the entire cost structure of a deal including the actual property, carry cost, improvement costs, tenant considerations and commission structure.
Institutional investors, particularly real estate investment trusts (REITs), have also emerged as potential buyers of REO properties, in part because their initial returns potentially could be 150 basis points greater than core markets near the coasts and major urban centers.
Conventional financing is readily available if the buyer is willing to accept a loan-to-value of 75 percent or 80 percent. Even so, we’ve had experience with lenders lowering the down payment to less than 20 percent of the total purchase price after they toured the property and gained a better understanding of the underlying asset and qualifications of the buyer/borrower.
The banks, however, are maintaining rigorous standards for borrowers to have more liquid assets in the bank after the point of purchase. There have been some upfront all-cash purchases, with most buyers later putting mortgages on the properties.
Less Urgency To Sell
After warming up in 2011, 2012 was the most active period for REO sales in the Minneapolis metro market. We anticipate the market for distressed sales will slow down the remainder of this year and into 2014 simply because many of the sales that occurred were assets formerly held by failed banks and managed by special servicing agencies.
The institutions that acquired the assets and liabilities of the failed banks then more easily liquidated these properties.
The bottom line for REO sales in Minneapolis going forward is that banks with underperforming commercial real estate assets will move with less urgency to sell these assets.
The exception to the trend may be found among the more challenging and less desirable properties — properties that failed to function for a reason, whether it was location, misplaced product type or because the property is not easy to reposition.
There still may be some deals in the REO market, but they will be fewer and farther between.
— John Chirhart and Lou Suski, vice presidents of sales and leasing for Gaughan Cos./CORFAC International