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Investors Waiting To Find Bargains On Distressed Properties

Investment bargain hunters are itching to go shopping in the market for distressed commercial real estate assets, but experts note that real opportunities to buy — locally and elsewhere — may not be arriving for several more months.

A key reason: Most lenders are still not pulling the trigger on delinquent commercial loans even as their numbers continue to rise. But that could soon change.

“You could see the shoes start to drop in the second half of 2010, or at least by year’s end,” said Alex Zikakis, president and CEO of Carlsbad-based Capstone Advisors Inc.

For instance, Capstone, which provides investment and receivership services, has been hired by lenders to manage real estate assets throughout California and the U.S., secured with more than $500 million in troubled loans during the past year.

Zikakis said many of the California projects, which ended up in some type of delinquency or receivership, are residential housing tracts in places including Riverside County, the San Francisco Bay Area and Silicon Valley. There have also been office, apartment and industrial properties, but few of the recent projects it has handled are in San Diego County.

However, more local projects are likely on the way, and heading for the sales block.

“Everybody knows that the distress is out there,” Zikakis said. “It’s just a matter of when those lenders and special servicers are going to move those assets out there.”

Demand Outstripping Supply

In a report issued April 12, the consulting firm Ernst & Young said demand is still outstripping supply in the nonperforming loan market. More than 60 percent of respondents to the firm’s recent national survey said they had bid on distressed properties or portfolios in the past year, but less than 17.5 percent were successful in completing the transaction.

“The question on everyone’s mind today is whether the U.S. distressed loan market in 2010 and 2011 will be the same as 2009, characterized chiefly by buyers waiting for sellers to turn up and transact,” said Mark Grinis, leader of Ernst & Young’s Real Estate Distress Services Group in New York.

Another prominent consulting firm, Deloitte, recently forecast that the start of a national economic recovery later this year could bring rising property values, spurred by greater confidence in future occupancy and rent increases, and thus more buyers.

With many property owners still struggling with debt maturities in 2010 and beyond, commercial foreclosures are likely to increase, and opportunistic investors will come off the sidelines to add to their portfolios.

E.J. Huntley, a Houston-based principal and real estate specialist with Deloitte Financial Advisory Services, notes that the top 10 U.S. funds that invest in distressed debt have around $45 billion in reserve waiting to be invested. Other industry estimates put the amount waiting to be invested at more than $75 billion.

Prices Not Dropping Dramatically

But spreads between bidding and asking prices are still large, Huntley says, and prices aren’t dropping as quickly as investors had anticipated. That’s partly because lenders aren’t moving to foreclose in large numbers; but when they do, markets including Southern California should see more robust sales in distressed assets in the coming year.

For now, Deloitte notes that investors are still waiting for a market bottom.

Observers say pressure is mounting on lenders to unload troubled assets as commercial delinquencies mount, particularly projects that were financed via commercial mortgage backed securities, or CMBS.

Fitch Ratings reported recently that the U.S. delinquency rate for CMBS loans was 7.14 percent in March, up from 6.29 percent in February. The research firm Realpoint LLC, in a March report, noted that as of February, the nationwide delinquent unpaid balance on CMBS loans reached $47.82 billion, and the overall commercial loan delinquent balance was up nearly 300 percent from a year ago.

Loans in distress for 90 days or more, as well as those entering foreclosure and being repossessed by lenders, grew in aggregate for the 26th straight month, and the number of loans now in special servicing increased for the 22nd consecutive month, Realpoint reported.

Local Numbers

According to business news and data provider Bloomberg L.P., San Diego County ranks 13th among 25 major metro areas for its percentage of CMBS transactions considered problematic, with 6.74 percent of loans analyzed in some stage of delinquency or foreclosure.

Bloomberg notes that the Riverside/San Bernardino metro area has the nation’s highest concentration of problem loans, with 16.81 percent in some stage of delinquency or foreclosure.

Also according to Bloomberg, the San Diego metro area has 24.88 percent of its CMBS loans on watch lists — as lenders anticipate potential delinquencies down the road. For watch-listed loans, San Diego ranks eighth among major U.S. metro markets.

Research firm Real Capital Analytics Inc. reports that San Diego County, at the end of March, had 120 commercial loans considered distressed, with a total value of $1.8 billion.

In recent months, San Diego County properties that entered into special servicing, or were placed on the market by their lenders, included the Ramada Plaza Hotel in San Diego; a shopping center in Chula Vista anchored by Albertsons; the Hacienda del Mar office complex in Del Mar Heights, purchased in a bank sale; an office building in Four Governor Park; and a medical office in Bonita.

“It’s just the tip of the iceberg,” said Zikakis.

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