Commercial foreclosures rocket

Valley is 'at the tip of the iceberg' for notices, expert says

by J. Craig Anderson - Aug. 5, 2009 12:00 AM
The Arizona Republic

More than 2,000 commercial properties in Maricopa County have received 90-day foreclosure notices since Jan. 1, representing $6.3 billion in real-estate loans on which the borrowers have failed to make payments.

That number is staggering when placed in contrast with the average commercial foreclosure rate over the past decade, which has been practically zero.

The problem, sparked by property-value declines and a paucity of refinancing options, has produced a steady flow of distressed commercial properties onto the market, with a heavy emphasis on small and midsize office and retail centers.

Industrial and warehouse properties also have suffered tremendously, due in large part to disappearing jobs. More than 1 million square feet of previously occupied industrial and warehouse space was vacated in the second quarter.

Commercial-real-estate broker Bret Isbel has been tracking actual foreclosure sales in Maricopa County, which can take several months to occur following the issuance of a foreclosure or trustee's sale notice.

The number of notices issued has been holding steady at between 300 and 400 a month since January, but actual foreclosures vary more widely, because it can take months - potentially even years - for a property in default to be repossessed by the lender or sold to a third party.

In Arizona, a lender can foreclose in either of two ways: It can take the borrower to court via foreclosure, or it can bypass the court system and call for a trustee's sale, which is quicker and less expensive but requires the lender to waive certain legal rights.

Isbel said there's no indication that the pace of commercial foreclosures is about to taper off. If anything, it's still building momentum.

"We're at the tip of the iceberg, there's no doubt," said Isbel, of Scottsdale-based GPE Commercial Advisors. "It's just a question of how big it is underneath."

The inescapable problem for many commercial developers is that they've had to maintain the same construction loan payments while lowering rents because of dwindling demand for leased commercial space.

While the federal government has created programs to help homeowners in danger of foreclosure negotiate lower mortgage payments, no such program exists for commercial-property owners, and none is expected.

By and large, commercial-mortgage lenders are not modifying commercial-real-estate loans, even as commercial-lease rates have plummeted as much as 75 percent in some areas.

Isbel said county records show more than 50 commercial foreclosure sales in June, the most recent full month available, with a total mortgage value of about $54 million. Geographically, they're all over the map, including the East Valley, West Valley, Scottsdale and downtown Phoenix.

Declining rent income isn't the problem for all area commercial centers, real-estate data analyst Zach Bowers said.

Owner-occupied projects including "commercial condos," where individual office or retail spaces were sold to small-business owners, are going back to the lenders, said Bowers, of Ion Data in Mesa.

Not unlike their residential counterparts, commercial condos were overbuilt and now represent a disproportionately high percentage of commercial foreclosures, the analysts agreed.

They include medical and dental offices that opened, much like retailers did, in high-growth areas on the fringes now hit hard by residential foreclosures.

"We've been seeing dental properties popping up every week (in county foreclosure records)," Bowers said.

Commercial broker Marc Bonilla, who specializes in selling medical-office properties, said they can still be attractive investments to buyers paying today's lower prices, but that it depends largely on the tenants.

Bonilla, of Colliers International in Scottsdale, recently negotiated the $12.1 million sale of a 40,000-square-foot medical-office project in Peoria.

Arrowhead Professional Park, 16222 N. 59th Ave., in Glendale, was not a foreclosed property, Bonilla noted. The owner, Phoenix-based Arrowhead Health Office Properties, sold it to real-estate investment firm Jomike Realty Co., based in New York.

While Jomike technically bought the building, he said, the true investment was in future lease revenue from its occupants.

"Number 1, it was fully leased," he said, "and Number 2, it has tenants that have been successful in this market for a long time."