Shopping centers are not the only community with the repayment problems.  Industrial facilities that are under occupied are having their own trouble.

- Erik

Shopping Center Receiverships and Foreclosures Usher In New Year

Sasha M Pardy January 6, 2010

The retail real estate industry was jarred over the recent string of receivership and foreclosure news involving major shopping centers -- which was unsettling at a time when the industry was hoping for positive news on consumer spending during the recent holidays and a hopeful beginning to recovery in 2010. 

For insight on this issue, CoStar interviewed Greg Maloney, president and CEO of Jones Lang LaSalle Retail, whose firm has been appointed as a receiver or is dealing with several retail properties in foreclosure. In December 2008, Jones Lang LaSalle announced it had been appointed as the receiver for 10 retail properties. Today, the firm has 25 properties in receivership status that it is managing while it either tries to sell or reposition foreclosed properties. 

Most of 2009 was marked by lenders and special servicers trying to get their arms around properties struggling with their loans, sorting out the most pressing problems, and attempting to tackle those in a "very thoughtful and hopefully profitable way," said Maloney. He said the timing of foreclosures and receivership announcements occurring at the end of the year was largely driven by year-end decisions by their lenders. "Servicers and banks were saying, 'if we're going to close these things out in 2010, lets foreclose on what we can by the end of the year.' " 

Maloney expects this activity to continue well into the first part of this year as lenders that have decided to foreclose will want to do so "sooner rather than later." In an effort to keep costs down and speed the process along, Maloney expects many lenders and servicers will opt to "bypass receivership, foreclose on the subject property, put it in their REO portfolio, hire somebody to come in and secure the asset, and then turn it over to their investment sales people to get rid of it." 

The exceptions that are more likely to first go into receivership, said Maloney, will be the very distressed assets, such as unfinished properties caught in disputes between the borrower and lender, and retail properties hit hard by a large number of vacancies. 

With the caveat that there can be many circumstances affecting the strategy lenders and servicers decide to take, Maloney said, "Receivership is generally a very expensive process that [lenders] usually put a very troubled asset that has lost a lot of its value and they don't want to take on the liability risk at this time." 

However, if the property is simply under-performing without a great deal of liability exposure, the lender might as well just foreclose on it, he added. 

Regarding retail loan default trends, Fitch Ratings recently reported that the CMBS loan delinquency rate rose again in November -- reaching 4.29%, which is up 43 basis points from the month prior. While delinquency rates were up in November among all property types, the retail delinquency rate rose only slightly, from 3.55% in October to 3.81% in November, accounting for $5.2 billion in delinquent retail CMBS loans. This rate is up from only .63% delinquency in November 2008. 

However, Maloney said the CMBS loan default rate is no longer the key driver of shopping center foreclosures and receiverships. "The majority of the troubled retail CMBS loans have already been turned over to the special servicer or lender. There will still be more. However, the real traunch is the non-CMBS stuff, which is really starting to come up in 2010 and 2011. These are loans that are just going to mature and the lenders are very concerned because most of the properties have lost value. The property is worth less than what they loaned on it two to five years ago. That is what's really going to take place in 2010 -- a lot of borrowers and lenders, even more than before, trying to come to some sort of agreement to extend the loans and keep things going," or turn over the keys, said Maloney. 

In the receivership process, Maloney said that in most cases, a lender hopes the receiver will stabilize the property, finding tenants for vacancies and keeping current tenants in place, so that it ultimately can be sold out of receivership, rather than taking it through the foreclosure process. 

But that is easier said than done in today's market as potential buyers are still reluctant to execute sales at current pricing levels, said Maloney. "We have them in the market and I think we're very close to it. I think in the first quarter you're going to see a lot of the assets starting to trade hands -- especially out of receivership and foreclosure." 

In most cases, especially in the first half of this year, Maloney said he expects sale prices to be low -- in many cases well below their previous purchase prices. 

"I think the properties we're going to see sell first are the ones that have lost a lot of occupancy and NOI," said Maloney, adding that he expects a large number of distressed properties brought to market in the beginning of this year with the hope of making a quick sale and reposition for recovery by the end of 2010. 

According to CoStar information, the fact that the number of retail properties in distress continues to rise supports Maloney's expectation. In the Sept. 24 CoStar article, "Recession Levies Hefty Punishment on CRE Property Values," Mark Heschmeyer reported that there were nearly 9,700 shopping centers in the U.S. under "distress" -- based on a tally of retail centers with vacancy rates of 60% or higher. As of this week, that number is up to 10,400 centers under distress, representing a 7.3% rise in little more than three months.