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Commercial foreclosure tsunami supplanted by slow and steady

For more than a year, people close to the foreclosure epidemic have predicted a tsunami to strike the commercial real estate market.

The collapse of retail centers, apartments, office parks and industrial complexes would further damage a fragile economy already reeling from the crisis of residential foreclosures.

Should we still expect the crush? Perhaps not, some local experts say.

Just a year ago, Thomas McGrady, chief judge of the Pinellas-Pasco County Circuit, said a new wave "could break the whole system."

Unlike residential foreclosures, commercial filings are usually contested. They creep through the courts and consume more resources. For example, the seizing of a shopping center could involve lawyers for the developers, tenants and banks, and could turn into a full-blown civil trial.

But while commercial cases are up some, the onslaught hasn't hit, McGrady said Thursday. Pinellas County, for example, saw just 250 commercial foreclosure filings in 2010, compared with more than 6,000 residential cases.

"I would have expected to see more now," the judge said. "It's good for the courts."

What changed?

Darron Kattan of Franklin Street in Tampa said lenders are preventing commercial foreclosures by continuing "extend and pretend" practices some thought might have faded by now.

In those cases, lenders extend the loans, pretend that values haven't collapsed and hope the economy improves before the loans expire. Banks, he said, are playing a sophisticated game by propelling the losses into the future.

"They are not in a hurry to push the gas pedal on these foreclosures," he said.

The senior managing director of Cushman & Wakefield in Tampa says he never believed dire predictions about the commercial market.

"That is not going to happen," Larry Richey said.

He credits an improving economy and the fact that very few commercial properties have been built since the real estate market burst in 2006.

Unlike the residential sector, he added, banks absorb higher losses when they quickly repossess commercial properties as they enter into default. It's cheaper for a bank to own a ranch home than a strip mall, which carries higher taxes and maintenance costs.

And while the commercial market still struggles, he said some businesses are starting to search for more space.

Indeed, a Colliers International report released this month shows office vacancy rates dropped for the first time in the bay area since fourth quarter 2008. The figure declined from 16.4 percent in the second quarter to 16 percent in the third quarter.

Still, nationally, commercial property values have been in a downward spiral.

Values have dropped more than 40 percent since the beginning of 2007, according to the federal government. A February report by the Congressional Oversight Panel warned that commercial loan losses could wreck the stability of many banks, mainly midsize and smaller, and prolong a troubled economy.

The report noted that nearly half of those loans were underwater, where owners owed more than the value of the property. The panel projected losses between $200 billion and $300 billion for 2011 and beyond.

Patrick Kelly, managing director at Grubb & Ellis in Tampa Bay, agreed many institutions would fail if lenders foreclosed on properties all at once.

The willingness of banks to modify loans has kept the market from being flooded with seized commercial properties, he said. Plus, regulators are pushing lenders to avoid the fire sale, he said.

"I have never seen a market where it has been so good to be a borrower," he said.

But he warned that $1.5 trillion in commercial loans will be due in the next 36 months and cannot be extended forever.

"It's going to come out of the system," he said.

But as time passes, business continues to pick up, blunting the impact.

Lee Arnold, chief executive of Colliers International in the bay area, said commercial business has improved by 25 percent over last year and continues to rise each month.

The foreclosure numbers are not skyrocketing because of short sales, loan workouts and deeds in lieu of foreclosure, he said — though he does believe they will rise.

But as property values are being reset to reflect today's market, he said, a slow recovery is under way.

Times news researcher Caryn Baird contributed to this report. Mark Puente can be reached at mpuente@sptimes.com or (727) 893-8459.

Commercial foreclosure tsunami supplanted by slow and steady 11/20/10 [Last modified: Monday, November 22, 2010 9:21am]
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