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Commercial real estate is a hot market, for court-appointed caretakers

COMMERCIAL REAL ESTATE QUARTERLY

As the sluggish economy deprives building owners of their property, receivers are in high demand.

January 24, 2010|By Roger Vincent

Last year, Mosier became receiver of the Bellagio of Palmdale, a tract of upscale homes that had been framed before the developer ran out of money.

The homes had to be finished before they could be sold. Mosier supervised construction for six months and then sold the homes for about $225,000 apiece, less than half what the original developers projected when they started work.

With trillions of dollars' worth of commercial real estate loans in the U.S. coming due this year and next -- and many lenders unable or unwilling to refinance them -- a wave of foreclosures is expected.

Hotels, which enjoyed a long boom after the depths of 2001, are considered the weakest commercial real estate category because the travel industry has been hard hit by the recession. Nearly every hotel that was financed or refinanced during the peak of 2006 and 2007 probably is financially upside down because its debt surpasses its falling value, according to hotel consultant Alan Reay of Atlas Hospitality Group.

Value is largely based on a property's income, and falling occupancy and room rates have reversed the fortunes of many hotel owners. Troubled properties include the St. Regis Monarch Beach in Dana Point, the downtown Los Angeles Marriott, the Sheraton Universal in Studio City and the W hotel in San Diego.

Offices, the largest category of commercial real estate, are somewhat less vulnerable because tenants sign long-term leases. Nevertheless, falling employment and business failures have driven down occupancy and rents nationwide, and foreclosures loom.

Warehouses and other industrial properties have seen smaller losses and are considered less at risk, as are apartments because occupancy remains fairly stable. Foreclosures are expected in all commercial categories, however, including buildings with unsold condominiums.

Units at a new Marina del Rey condo complex called Element were auctioned off last month by receiver Taylor Grant. The stylish building was intended to appeal to young, single buyers, but few materialized until Grant's Newport Beach-based California Real Estate Receiverships sold 41 units in two hours for a combined total of $20.5 million, an average of $500,000 apiece.

The pace of foreclosures should accelerate soon, Grant said. "Processes and procedures weren't in place," he said. Now lenders are gearing up to take action.

Commercial loan failures won't create the same blow to the national psyche that the wave of home foreclosures has created, Grant predicted. "There are no sympathetic victims" on the scale of homeowners being ejected from their family dwellings, he said.

Builders, banks and large real estate investment trusts will bear the pain. In a large-scale commercial foreclosure, "the developer and the bank might lose $100 million each," Grant said. "It will have an effect on the economy, but the psychological effect won't be the same."

Real estate brokers ready to help sell troubled properties are already courting receivers.

"Receivers are going to be in a position to make determinations on whether a property will get sold and will be in charge of finding a broker to do that," said Laurie Lustig-Bower, a broker at CB Richard Ellis. "In the past it would have been very rare to work with a receiver."

Sales of Southern California apartment buildings should increase by 50% this year over 2009, Lustig-Bower said. Fueling the rise will be an air of resignation among owners and lenders who realize that they are unlikely to see the high property values of 2007 again any time soon.

"Sellers have come to the realization that we are in a new world order with pricing," she said. "After enough time has gone by, you get used to the idea that you are going to take a loss. People want to move on with their lives."

roger.vincent@latimes.com

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