Most of us in the industry have just been watching and waiting for the commercial market to hit bottom. Despite what seems to be positive signs in stock market, unemployment, and consumer confidence the commercial real estate market has continued to weaken.
Last week it was published that a large landlord with a huge portfolio of class “A” office towers, Hines, gave a San Francisco office tower back to the bank. It was also reported Hines is now in default on the Watergate Towers in Emeryville. Hines picked up these four buildings totaling 1.1 million square feet in late 2006 and if memory serves correctly, paid just under $400 million for the project. You can bet this is not the only landlord underwater and in trouble.
With commercial rent prices tumbling across the nation and vacancy rising, landlords are not able to make their proformas. Tenants large and small are asking for rent reductions , one said company is Burger King. Recently, the corporate heads at the fast food chain sent letters to the operators demanding that each location contact their landlord to request a rent reduction, whether or not profits had fallen. Many landlords granted the request, other were skeptical and asked to see financials. With companies such as Starbuck’s, Mervyn’s, and Expo Design closing their doors, a large inventory of space is available with no one to back fill. We all knew landlords were hurting and some were in bad shape but not until recently have we actually seen how strained landlords have become.
Just as we saw residential homes default and end-up back at the bank over the last 3 years, we are now seeing what looks to be the beginning of the same phenomenon in the commercial world. One of the first properties to head back to the bank in the East Bay is the office/light industrial business park in Livermore, Montevina.
The number of properties on the Notice of Default list is growing every week even here in the Bay Area. This will leave opportunity for those who have liquidity to pick-up great properties at distress sell prices. The big issue will be the fallout in the banking industry that could once again freeze the credit market and cause more banks to crumble.