Justus: Distressed-property absorption key to recovery

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James Justus has been president of Olive Real Estate Group since 1996, which specializes in investment and vacant land deals. He has been involved in commercial real estate for more than 30 years, representing local clients as well as Fortune 500 companies.

The last couple years have been pretty tough on everyone with the economy. How does next year look from where you’re sitting?

Next year looks like more of the same. If not, maybe even a little worse. People not close to the commercial market have a tendency, when they see signs of recovery in the residential market, to think that the same is true of the commercial market. I don’t think we’ve seen the worst of what we’re going to see in the commercial market. I think the decline in values and the way the market is headed is going to continue for at least a couple more years, and that a significant turnaround is going to take several years beyond that.

So what are some of the key indicators for overall strength of that market that you would look to, to say, ‘If this turns around, then we may start to see some tangible progress’?

The single biggest thing in my mind would be the absorption of distressed properties. There is a huge amount of distressed properties on the market today, and even more coming available in the next year to two years. A lot of those have not come available yet for several reasons.

Lenders who have taken troubled properties back have been reluctant to get them off their books at highly discounted prices because the lenders or banks then are put in a position where they have to recapitalize. So it’s difficult for them, and frankly, the government has created a vehicle that allows them to hold those properties for five years, so a lot of them are thinking, ‘We’ll just hold these things until the market turns.’

Another huge problem that I think is going to contribute to the decline in values is that there are many owners of properties today whose properties are not, quote, “troubled properties” today, but in the next year and beyond, there are billions of dollars worth of commercial loans coming due. If you own a quality commercial property that has cash flowing, is well-leased, but has a big loan due next year, in order to satisfy the underwriting requirements to renew or redo that loan, it’s going to be based on an appraisal, which, because of declining values, will be substantially lower, so suddenly you have a loan you can’t refinance, and now your good, well-performing property becomes a distressed property.

So in a way, it’s sort of the RTC (Resolution Trust Corporation) times. What needs to happen before values can start to go up is that all these distressed properties have to be absorbed, because as long as they keep coming on the market, they drive values down.

You mentioned the government briefly. Is there any one thing that the government could do to help the real estate market today, if anything?

I wish I knew what that was. Some sort of program that would, not unlike the RTC times of the late 80s and the early 90s — the good thing about those times is that all of a sudden, the distressed properties and the troubled properties were disposed of quickly. (Today) it’s going to take a long time, unless there’s some well-defined program to dispose of those quickly.

Audio excerpt of the interview with James Justus.