By Jonathan O'Connell
Monday, May 3, 2010; 3
With more than $3.1 billion worth of local properties in distress -- the fifth highest total in the country -- one might think the commercial real estate market would be entering full-on fire sale mode this summer.
Instead, investors appear to be taking a different approach as they return to the market -- paying top dollar for a sure thing.
In addition to the distressed properties, those with owners defaulting on loans or in foreclosure, another $2.1 billion in Washington properties are stressed, meaning they have loans coming due or tenants in default, according to research from Delta Associates. In all, more than $5 billion in local real estate is distressed or stressed, including empty office buildings along the Dulles corridor, multifamily residences in Prince George's and marquee properties in the District including the Renaissance Mayflower Hotel.
Shoppers looking for deep discounts, however, have mostly been left disappointed, according to owners, developers and brokers.
"While there's a lot of talk of distressed assets trade there has not been a lot of distressed asset trades," said Matt Klein, president of Akridge, a D.C. developer. Klein recently hired Tae-Sik Yoon as Akridge's new vice president of capital markets. Both expect many more sales after a mostly dead 2009. "Two years ago it would have been extremely difficult to attract capital," Yoon said. "I think investors are looking to put more and more capital into the market."
But Yoon predicts many deals to come on trophy buildings filled with stable tenants who provide a steady stream of rental income. "Everyone is still looking for cash flow and everyone is still looking for safety," he said.
The model for sellers is 1999 K Street, the 250,000-square-foot office Vornado/Charles E. Smith sold to the German fund Deka Immobilien GmbH last September for $207.8 million. Two other high-end buildings on the market, the former headquarters of the Evening Star newspaper at 1101 Pennsylvania Ave. NW and Washington Harbor, the 526,000-square-foot Georgetown office and retail complex, are also expected to attract hefty demand, according to George E. Covucci, partner at Arnold and Porter. They are 85 and 95 percent leased, respectively, according to CoStar Group Inc.
"There is an enormous amount of capital out there chasing a handful of assets. And they're chasing what I call perfect assets -- Class A office buildings in Washington with incredibly stable tenant bases," Covucci said.
Rather than foreclose on properties and sell them off cheap, as lenders did in the last downturn, Covucci said federal government leasing and interest from foreign investors has persuaded lenders to distressed properties to wait things out. The same appears to be true for multifamily and condo buildings. The $35.8 billion of distressed apartment properties nationally nearly matches that of office buildings, according to Delta.
"Everything right now is distressed, in some way," said Julio Murillo, managing member of Murillo/Malnati Group, a D.C-based developer. Murillo is looking for multifamily properties to buy and develop, but has not seen a lot of deals rushed to market because of borrowers with debt problems. "They're not truly in trouble until the lender pulls the plug," he said.
He said there is more interest from investors of all kinds recently, but unlike five years ago, that interest isn't in a planned condo development or a piece of land. They too are looking for established properties. "Now investors are more selective," he said. "They want something that they can see and touch."
With increased sale activity expected, Jones Lang LaSalle is looking to expand its business brokering multifamily deals, recently hiring away multifamily investment brokers Al Cissel and Scott Melnick from Transwestern.
Cissel said foreign, private and institutional investors are all looking more aggressively but are still risk adverse enough that they aren't eager for properties that require complex repositioning. As a result, he said, the distressed property owners who do test the market are finding lower prices than they are willing to sell for. He said he expected lenders to continue to work out arrangements with borrowers and that "the distressed property scenario should be short-lived."
"In '89 or '90, the last time we saw this movie, they were just taking everything back . . . this time around, the lenders don't want to take their properties back," he said.