COVER STORY, JANUARY 2009

EXPERTS ANSWER S.O.S.
Divisions launched to handle boom in distressed assets.
Jon Ross

It all started in the residential market. The economic meltdown of 2008 and the crunch on lending institutions led to residential foreclosures across the country. Until the middle of the year, commercial properties remained relatively unscathed, but tough financial times are no longer limited to single-family homes. Economic woes have cracked the commercial market, leading to uncertainty about the future and a pile of distressed office buildings, warehouses and retail properties.

Flavin

“The commercial side was relatively stable,” says John Flavin, vice president of the Florida region at Opus South. “You’re beginning to see stress on the commercial side because of the credit situation and people being unable to refinance at lower loan-to-value ratios.”

To address this growing problem, a number of firms have created divisions in the Southeast focused on valuing and handling distressed assets. New Jersey-based Integra Realty Resources recently formed the Rapid Response Team, which consists of members from offices in the Southeast and nationwide, and in Miami, Colliers Abood Wood-Fay has formed the Advisory Services Group. K&L Gates of Charlotte, North Carolina, is helping out with its Distressed Real Estate Task Force. Additional national firms offering assistance with distressed assets include Marcus & Millichap, Jones Lang LaSalle, Grubb & Ellis and Cushman & Wakefield. Sperry Van Ness has launched a 20-member Asset Recovery Team.

The issue is based in market uncertainty. Transactions can’t be completed until property values are assessed, and economic fluctuations mean prices are constantly changing.

Krauser

“Nobody really knows what their real estate is worth,” says Matthew Krauser of Integra Realty Resources. “The most important thing is to look at the current economic characteristics, the credit worthiness of the tenants. There’s a big change from where credit tenants were a year ago.” Flavin has been handing distressed properties for years as an integral part of his work at Opus South. Distressed property services, he says, are essential in the current climate, but the issue hasn’t become as widespread as some people think. “There’s more of an anticipation of distress than there’s actually a lot of good examples of distressed properties,” Flavin says. “You can see examples of projects that have stopped, but often its because of some contractual dispute — it isn’t necessarily a distressed property yet.”

Phone calls for distressed property services come from a variety of places, and each group has its specialty. The law firm K&L Gates brings together bankruptcy, insolvency and real estate lawyers to work on issues that may not have previously required the expertise of all three areas of law. Michael T. Fay of Colliers Abood Wood-Fay has gathered a 10-person team to walk clients through financial forecasting and property planning and management review services. “We’re getting phone calls from different lenders and different institutional groups who say, ‘What can you do to help us out?’” says Fay, who started answering questions about distressed properties in June. “Sales right now are the big thing — predominately in land. The retail’s coming up, and we’re going to see more and more issues coming around.”

Jones

At Integra Realty Resources, the company’s team focuses on valuing distressed assets in all property types for customers who don’t need a full appraisal. Where traditional appraisal reports would analyze sales from as far back as 1 year ago, the Integra group focuses on a small period of time to give properties a current value. Krauser says the company receives calls from financial and lending institutions who want a report on their holdings. “Clients all over the place are calling to get a handle on what’s happening in this market. Until they start to understand what their assets are worth, they can’t sell them,” he says. “They’re either writing these assets down or disposing of these assets, and it’s really important to get a handle on what they’re worth.”

Fay recognizes that distressed properties are a nationwide concern, but he sees a large number of distressed assets just in his South Florida location alone. Leading up to the economic slump, the Florida landscape had been densely populated with developers looking for financing. Lenders, in turn, aggressively arranged deals. The sheer volume of properties meant that when the floor caved in, lenders were invariably left with distressed assets. “A lot of people came to Florida as first-time commercial investors,” Fay says. “A lot of larger institutions, public and private, were making large moves into Florida because of asset allocation and different opportunities for development.”

Fay

These groups share a common goal: reviving the commercial real estate market. Putting a value on properties in an unstable market goes a long way toward reversing commercial real estate’s downward spiral. “Over the last couple of months, everybody’s been in such a panic that everybody’s been in a hold position,” Krauser says. “Once people start to be able to understand what their properties are worth, we’ll start to see more transactions happening.” Fay is quick to point out that there are no quick fixes when dealing with distressed real estate. He predicts that these groups will be needed to help out for the foreseeable future. “The group will be around for the next 5 years, but I think the next 3 are really where it’s going to be very busy,” Fay says. “There are just so many issues and there are so many assets. More and more are coming.”

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