VOL. 126 | NO. 71 | Tuesday, April 12, 2011
ANDREW C. PHILLIPS
Every commercial real estate submarket in the Memphis area has seen its share of foreclosures – even those with the strongest demographics and continued expansion and development. The assumption might be that foreclosures are occurring in lower income areas where crime and poverty have played a role in a property’s decline. But, in fact, foreclosures have occurred across all submarkets.
While there have been cases of owner-occupied property foreclosures, it is more typical that investors are bearing the brunt as the cost of maintaining properties continues regardless of whether tenants are there or are paying their rent. Unfortunately, real estate owners bought into the idea that values and lease rates would continue to compound at 2 percent forever and made little or no effort to shelter themselves for the rainy days that would ultimately follow.
Instead, as values declined, many owners became too overleveraged to adjust to current market conditions. As a result, these troubled owners have had difficulty attracting new tenants, as capital reserves that would have been designated for tenant improvements and incentives have had to be used to service their debt. It becomes a vicious cycle: landlords cannot make deals if their building is in default or heading in that direction, and they cannot service the debt without tenants.
Foreclosure is never a situation we want to hear about because it means someone has lost ownership in a property. But with a considerable drop in market prices occurring as a result of the recent recession, opportunities to revive these distressed properties have begun to arise. New investors are putting capital into these properties and reviving projects that had been languishing. Recently, for example, one of our bank clients foreclosed on a car dealership where grass grew high through the pavement and trash blew across the abandoned lot. The bank was able to adjust their pricing to the market to allow a user to purchase the property and make improvements that benefit not only the buyer, but also the surrounding businesses.
The trend of owner-occupied deals is something we’re seeing more of these days. While real estate investors continue to have challenges accessing capital to purchase real estate, owners who plan to occupy a portion of the space are able to find funding more easily through programs like the SBA 504, which specifically targets owner-occupied properties.
Marty Ferguson, vice president of small business lending with Magna Bank, says they have seen a major increase in people taking advantage of the SBA 504 program over the last year because it provides a way for owners to get longer-term financing without having to put up as much capital as they would with a traditional bank loan. Additionally, there is a new stimulus-related SBA 504 program that provides an opportunity to refinance owner-occupied property loans maturing through 2012.
We see a tremendous opportunity for business owners to become the new investors in the market by purchasing instead of leasing. Prices are favorable, financing is available, and it’s a new day in the commercial real estate market.
Andrew Phillips is manager of the Colliers Memphis asset resolution team representing private and institutional clients.