Commercial developers, lenders in ‘stare down’

By Brian Wargo (contact), In Business reporter

Fri, Jun 26, 2009 (3 a.m.)

Property owners are doing what they can to cut prices to lure buyers, but the market for office buildings, retail parks and other commercial development is at a standstill.

As of June 4, New York-based Real Capital Analytics reports 53 sales worth $17.7 billion have closed in the past 12 months out of 185 for sale.

The worst rate has been in retail: 13 out of 71 on the market sold for a total of $143 million or $198 per square foot.

Hotels have fared the best with 13 of 16 properties on the market selling in the past 12 months at an average price per square foot of $256,854. The sales volume was $17.2 billion.

Sales of office and industrial buildings have been tepid. Of the 29 office properties on the market, nine have sold with an average price per square foot of $227,000. Eight of 38 industrial buildings have sold with an average price per square foot of $109.

Prospective buyers are waiting for prices to fall more before jumping in. Price drops are expected once a wave of commercial foreclosures hits in the market in the coming months. Commercial-zoned land is expected to be the first to hit the market.

But even drastic reductions in prices haven’t lured buyers.

Florida-based RPC Holdings acquired the former Klondike casino on Las Vegas Boulevard for $23.7 million in September 2005. The developers planned a resort with 1,800 rooms. The plans included five acres to the north, but it had problems financing in the current market, says Michael Argier, an associate with Colliers International.

The 5.3 acres, which are in the process of being foreclosed, were recently for sale for $8 million, Argier says. The price has since been removed and all offers are being considered, he says. The lender is Hillcrest Bank of Kansas City, Mo., and because it may take possession of the property, it is motivated to get it off the books, he says.

Some prospective buyers have tried to acquire the property at well below the original asking price, but too low to make a deal, he says.

“I think it says you really need to be a bargain to get anyone’s attention,” Argier says.

He says that is understandable when you take into account there is no financing available, and it would have to be an all-cash deal.

Consultant John Restrepo, principal of Restrepo Consulting Group, says he has heard stories of buyers coming in before a commercial property goes into foreclosure and paying 40 cents on the dollar or less.

The growing concern is that projects under construction won’t be able to get the rest of their short-term loans to be able to finish the work, Restrepo says. That may prompt some developers to turn the projects back to the bank, he says.

“So far, it is a bit of a stare down,” Restrepo says. “Who is going to blink first, the developer or the lenders? The developers are all suffering. How are they going to get more money for replacement lending?”

Many developers believe in their projects and want to stick with them, but they may have to bail, Restrepo says. That means some could return to the project later because lenders will have them at big discounts, he says.

Charles Moore, a senior vice president at CB Richard Ellis, says he expects several significant assets will trade this year, but they may not go through the foreclosure process. That has opened the door for short sales, he says.

Many commercial property owners are in trouble because of the economy. Their rents are down and the values have decreased, meaning the properties are worth more than the debt on it, he says.

Commercial values have fallen 30 percent to 40 percent since their peak a couple of years ago, and there is a good indication they haven’t hit bottom yet, Moore says.

The loan default rate has increased from 1.9 percent to 4.4 percent, he says.

Some lenders are reluctant, however, to start dumping properties on the market just to get whatever they can, says Susan Cotton, vice president of property management with Gatski Commercial. They are willing to wait 12 to 18 months to see if the market turns, she says.

Bob Walter, chief risk management officer at Nevada State Bank, contends the industry is becoming more creative to avoid foreclosures.

Banks don’t want to manage and develop properties and are showing a willingness to restructure deals.

But Walter says there are more opportunities for those looking to buy at extremely low prices.

“People never thought this would happen, but there is money flowing into Las Vegas from outside sources,” Walter says. “They are coming in to buy foreclosures and troubled assets. This is an opportunity to make high returns.”

Prudential Americana/Windermere

Windermere Summerlin is discontinuing its franchise with Windermere Real Estate of Southern Nevada and merging with Prudential Americana Group.

The agreement announced last week says Prudential, the largest firm in the state, will add about 100 real estate agents. Prudential emerged from bankruptcy protection in 2008.

Windermere Summerlin, founded by Heidi and Peter Kasama in 2004, was the first Windermere franchise in Las Vegas.

Windermere Real Estate has three franchises, which account for 80 percent of the company’s real estate sales in Southern Nevada.

In other news:

• The State Bar of Nevada elected its 2009-10 officers during its board meeting at Lake Tahoe. Kathleen England of the England Law Office of Las Vegas will be president. Cam Ferenbach of Lionel Sawyer & Collins is president-elect. Constance Ackridge of Jones Vargas is vice president.

• I am taking over the law beat from Stephanie Taveres, who has moved to the Las Vegas Sun, a sister publication to In Business Las Vegas. I will continue to cover real estate and development.

Brian Wargo covers real estate and law for In Business Las Vegas and its sister publication, the Las Vegas Sun. He can be reached at 259-4011 or at wargo@lasvegassun.com.