Banks unload commercial real estate

Since the beginning of the Great Recession, banks have been saddled with a glut of commercial real estate that they took back when property owners could no longer make payments or could not get their loans refinanced.

For a while, the Federal Deposit Insurance Corp. (FDIC) put little pressure on banks to deal with their commercial real estate portfolio, and banks sat on the commercial real estate assets they were accumulating. However, recently sales of bank-owned commercial real estate have increased significantly as federal regulators are now putting pressure on banks to unload their commercial real estate dead weight, commercial real estate brokers say.

“The banks are just getting rid of it,” said Mike Judson, president of Pewaukee-based Judson & Associates.

“It seems like the volume of sales that banks are approving and implementing has picked up lately,” said Patrick Gallagher, chief executive officer and principal of Milwaukee-based Siegel-Gallagher. More bank-owned commercial real estate sales are expected in 2012, he said.

Some companies that owned their own buildings lost them to banks because they were unable to make payments on their commercial real estate loans as their business declined since the recession began. Some property owners lost their buildings to banks because they were unable to make payments after they lost tenants and either could not fill the space or were forced to lower their lease rates to fill the space and could not produce enough revenue to make their loan payments, Gallagher said.

In other cases property owners lose their buildings because the banks refuse to refinance commercial real estate loans that come due unless the borrowers put up more equity because the value of the properties has declined. That can happen even if the building has good cash flow and the owner can make their payments, Gallagher said.

“As the economy continues to sputter along there are more borrowers that were holding on as long as they could but are now out of gas and are losing their properties to the lenders,” Gallagher said.

Recent sales of bank-owned commercial real estate in the Milwaukee area include:

  • Cincinnati-based Phillips Edison & Company’s purchase of the 189,116-square-foot Sendik’s Town Centre, a retail and office development at Capitol Drive and Brookfield Road in Brookfield, from BMO Harris Bank for $15.4 million.
  • Capmark Financial Group’s sale of Mequon County Club for $1.5 million to a Milwaukee-area investor who plans to renovate the property.
  • Chase Bank’s sale of the 37-unit Marina Road Apartments at 3303-05 Marina Road in South Milwaukee for $1.175 million.
  • The Equitable Bank’s sale of a 100,283-square-foot industrial building at 2500 W. Cornell St., Milwaukee, to Nakayla LLC.

The FDIC is putting more pressure on banks to unload their troubled commercial real estate assets, and the environment to sell commercial real estate has improved as opportunistic buyers are bargain-hunting and banks are providing more financing to commercial real estate buyers, commercial real estate brokers say.

“My impression is that the FDIC has gotten more aggressive in pushing the banks to dispose of their commercial real estate assets to get them off of their books,” said Dan Jessup, president of Brookfield-based Grubb & Ellis|Apex Commercial.

“I’m not a banker, but from what they’re telling me, the regulators have said, ‘You need to get rid of some of these properties,'” said Judson.

“It’s been a long road,” said James T. Barry III, president of Milwaukee-based Cassidy Turley Barry. “(The banks) have had a lot of those properties on the books for a long period of time. They’ve just decided it’s time to make deals and get this stuff off of their books. It’s a matter of banks waiting for the market to improve, and the market has improved.”

A slight improvement in the capital markets for commercial real estate has helped banks sell the properties they have taken back, Jessup said.

“I think (the increase in sales of bank owned commercial real estate) can be directly attributed to the fact that banks are back (lending) in the commercial real estate market,” Jessup said. “In order for a bank to sell a property, someone has to finance it (for the buyer).”

In 2009 and 2010 banks were extremely reluctant to provide loans for commercial real estate, Jessup said. That has improved some this year, but the parameters are much higher. Borrowers need to provide more equity and more collateral than they did three years ago, he said.

Borrowers that can meet those standards are able to take advantage of the opportunity to purchase commercial real estate assets from banks at rock-bottom prices.

“A lot of buyers have realized there are good opportunities out there right now for distressed properties and if they don’t act now they are going to miss out,” Barry said.

Many of the commercial real estate properties that are selling right now are bank-owned because banks are willing to accept low ball offers that other commercial property sellers cannot, Judson said.

“Some of these bank-owned deals, you look at the price that they sold for, a normal seller can’t sell for those numbers,” he said. “You can’t compete.”

The increase in sales activity, of not only bank-owned properties but also other distressed properties that are on the verge of becoming bank-owned, has provided a boost to commercial real estate brokers.

“We’ve sold more assets this year than we have the past two years combined,” Jessup said. “We’re going to have our best year ever.”

“Brokers are still making deals. It looks like a lot of activity,” Judson said. “But it’s not good for the market. There are a lot of deals being made at good value to the buyers.”

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