The crush of residential property foreclosures may be slowing, but local brokers say they’re expecting a wave of retail, office and industrial property defaults in the coming months.
“We’ve only just started,” said John Robinson, a principle in the local office of Jones Lang LaSalle.
Many of the foreclosures are expected to come in the fourth quarter of this year, or in early 2010, as owners struggle to refinance debt and payoff substantial loans.
Retail properties facing an exodus of tenants may feel the brunt of the foreclosure pain, said Rebecca L. Wells, a vice president in the industrial services group of Colliers Turley Martin Tucker. When one anchor retailer leaves, others can often follow suit through lease provisions, she said.
“It just becomes a domino effect,” she said.
Office buildings and industrial properties are also at risk, especially if they took out short-term loans in the flush times three years ago, Robinson said.
When such aggressive loans mature, “people are going to be stranded,” he said.
That’s because, with the frozen capital markets, investors and property owners can no longer easily refinance loans as in the past.
Steve LaMotte, a senior vice president with CB Richard Ellis, said that problem may be especially troubling for the owners of multi-family housing, who expected to be able to refinance loans made in the late ’90s.
He said he expects to see a wave of apartment complex foreclosures beginning in the summer.
Class C properties will likely be the first to go, yet he said some of those would have defaulted even in stable economic times because of operational problems at the property level.
But LaMotte expects to see higher quality apartment complexes default in 2010 and 2011, too, as investors struggle to meet loan covenants or refinance debt payments.
“It’s very much a concern or an opportunity,” he said, depending on the perspective.
Buyers with cash might find some substantial bargains in the multi-family housing sector, he said, while owners may be forced to sell properties at a discount.
Overall values in the market could also slide if the number of foreclosures increases, LaMotte said.
“If we start to see a number of defaults, whether they’re payment defaults or maturity defaults and those properties subsequently come to market … it has the potential to further erode value,” he said.
As of Monday evening, LaMotte said a total of 34 multi-family and commercial properties were in danger of foreclosure in the Indianapolis area, citing internal CB Richard Ellis statistics. Those figures include only properties tied to commercial mortgage-backed securities, or loans that were made by conduit lenders and later securitized on Wall Street.
This group of loans comprises only about one-fourth of the $3.5 trillion in commercial debt outstanding, LaMotte said.
Joe DeHaven, president and CEO of the Indiana Bankers Association, said many of the problems facing commercial real estate likely won’t be resolved until unemployment stabilizes.
“My assumption is that we will not reach the bottom-particularly on the commercial real estate end-until we see unemployment bottom,” he said. “I don’t know when that will be.”