Silver linings during the commercial real estate crisis will come from the private, rather than the public sector.
“Just like 20 years ago, there’s been too much supply against dormant demand in the commercial real estate sector — a result of this down economy,” said Steve Schuck, chairman of the Schuck Corp. and a veteran of the Resolution Trust Corp. savings and loan real estate workout program of the late 1980s and early 1990s. “Why? Because Congress has encouraged (the financial sector) to make loans to unqualified borrowers, which results in too much supply. On a local level, there’s really little reason to expect there will be any new commercial development or construction in the near term except for build-to-suits or special custom projects.”
He sees the situation’s only salvation as the creation of primary jobs that bring a powerful multiplier effect to the local economy.
“Population growth is not enough to restore economic health and commercial development,” Schuck said. “It will take a focus by city officials, EDC (the Economic Development Corp.) and others on one thing: creation of new and better jobs.”
Like a number of other developers still standing — Nor’Wood Development, Classic Cos. and others — the Schuck Corp. has been asked to take over or advise some bank-owned commercial and residential projects.
Schuck Corp. President Bill Schuck said he has talked with more than one lender interested in pitching a workout REO property.
So far, the firm has chosen not to bite, preferring to stay focused on its development plans in progress elsewhere.
“Sure, we’re interested, but so far we haven’t seen anything worth pursuing in today’s environment,” he said. “Even once the economy starts to recover, we didn’t think these particular projects would come back in the next cycle — it might take two or three more up cycles before development would be viable.”
And while he might choose to pass on discounted workout deals, there are investors willing to buy portfolios of hundreds, even thousands of bundled distressed assets for 20 or 30 cents on the dollar he said.
“It’s actually a very competitive market at that level,” he said.
As for how to work through commercial distress sales, Steve Schuck believes that shifting underwater properties from foreclosure and bank real estate owned status to another developer at a 50 percent to 60 percent discount is short-sighted.
“That doesn’t solve the real problem of a dormant economy,” he said. “Our emphasis should be on growing our local economy — not on rearranging the deck chairs.”
Five Star Bank President Mike League sees the situation from a different perspective.
“We just got our charter this spring so we weren’t as active in commercial lending,” he said. “On one hand, we didn’t see the big profits that came along through the boom, but on the other hand we didn’t have the exposure some others had.”
He said Five Star’s workout portfolio includes “less than a handful” of commercial real estate loans.
“We’ve been on the sidelines, watching,” League said. “Most lenders are between a rock and a hard place. Regulatory bodies want you to mark commercial loans to their realistic value — as aggressively as you can. It’s hard, once you’ve got raw or vacant land, for example, to find the value in a market where there’s so little velocity, so little market for it.”
Aside from the difficulty of establishing value on now-at-risk collateral, there’s the sharp downturn in sales prices to figure into the equation.
“Have you seen the prices some office buildings are selling for these days — $20 to $30 per square foot?” League asked. “You couldn’t replace them for three times that or more.”
League has seen some faint signs of hope in the lending community. He pointed to one entrepreneurial regional bank owner who has established a private entity outside his chartered bank that can receive and finance some distressed commercial real estate.
If a property is salvageable or located at a highly marketable intersection, for example, the private lending group can work out terms with a developer and avoid foreclosure.
“You’ve also got some bottom feeders, some sharks out there. They call us every week, looking for commercial deals they can buy with cash and hold until the market improves,” League said. “We’re still working with borrowers who haven’t given up. For some it’s too late. But if we can work something out, it’s better than going to foreclosure.”