Swelling default, foreclosure figures ominous

Steve Marcus

Analysts predict a wave of bank takeovers of commercial properties like this empty office building as vacancies and loan defaults continue to increase.

By Brian Wargo (contact)

Monday, June 22, 2009 | 2 a.m.

The number of commercial properties facing foreclosure in the Las Vegas Valley is growing rapidly, leading to expectations of a massive bank takeover of office and retail buildings in coming months.

The number of properties in default, foreclosure or involved in bankruptcy in April was the largest monthly increase so far in this recession, according to New York-based Real Capital Analytics.

The firm ranked Las Vegas No. 1 in the nation with $9.7 billion worth of properties in distress and another $5.7 billion worth that have been resolved.

That’s a bump from its report earlier this year stating the value of troubled loans in Las Vegas was $6.4 billion.

Since the first of the year, lenders have filed default notices against 323 properties in the valley, according to Nevada Title Co.

Most of the bank takeovers have been of undeveloped land — more than 90 percent by one estimate — but real estate brokerages say more lenders are starting to take possession of buildings as well.

“The lenders are tightening up, and the deadline is coming on loans, and they are not refinancing,” said Jeff Harris, president of Nevada Title.

“That is causing some turmoil. It has been mainly land we have been dealing with so far, but I hear rumblings that buildings are on the way. Hopefully, lenders will loosen up and give people some breathing room.”

Any property takeover by lenders is expected to depress prices more as the lenders seek to get the properties off their books. That could lead to more foreclosures and weaken local and regional banks that made the loans.

Susan Cotton, vice president of property management with Gatski Commercial, said that since the end of March her firm has taken over management of six commercial buildings totaling 250,000 square feet after the properties went through receivership.

Cotton said she expects to be managing another 400,000 square feet in the next 30 days.

“For the first time in my 20 years in the business, clients are struggling to make mortgage payments,” Cotton said.

“Properties are going into receivership, and this is the tip of the iceberg. It is going to continue to escalate the rest of 2009.

“Foreclosures hit the residential market, and now it is happening to commercial. It is a whole new ballgame for everybody. We are all trying to feel our way through this. It is coming so rapidly.”

In its report, Real Capital Analytics outlined the $9.7 billion in distressed properties:

• $4.48 billion in land.

• $2.4 billion in hotels.

• $1.6 billion in retail with 5.4 million square feet.

• $830 million in apartments with 7,374 units.

• $177 million in offices with 678,377 square feet.

• $43 million in industrial with 258,819 square feet.

• $27 million in “other” properties.

One of the troubled loans is a default by Triple Five Group’s Great Mall of Las Vegas, in the northwest part of the valley, one of the more prominent properties.

Cotton said lenders are getting court orders putting properties in receivership for those in default. That allows lenders to protect assets with the receiver taking control of the buildings and collecting rent. The owners, meanwhile, are trying to work out deals with lenders.

With office vacancy surpassing 20 percent and retail and industrial buildings reporting increases in vacancies, landlords are struggling to find tenants.

“We have tenants who have been in business 20 to 30 years that are closing down completely,” Cotton said. “We are seeing a lot of business failures. And with so much space available, there is a lot of competition. When you are trying to renew leases, you have to be aggressive or you will lose tenants.”

Michael Campbell, managing partner of Colliers International, said his firm has at the request of banks taken over management of a variety of properties, including undeveloped land and a golf course (Stallion Mountain).

Campbell said he hopes lenders will rewrite loans, but that may be impossible.

Meanwhile, many property owners are filing for bankruptcy to postpone foreclosure until they can formulate a plan or as a way to avoid personal guarantees, he said.

“I would say we are headed in a downward direction, but I don’t see that it has ramped up yet,” Campbell said. “With all these loans coming due, there will be more defaults and foreclosures.”

Kevin Higgins, senior vice president of Voit Commercial, said there’s no indication that lenders will ease off on pursuing foreclosures. Lenders tried to work with clients in 2008, but started filing default notices in January, and that is picking up steam.

The timeline from filing default notices to foreclosure is four months, he said.

“It is going to be interesting this next six months,” Higgins said.

A version of this story appears in this week’s In Business Las Vegas, a sister publication of the Sun.