Commercial real estate market in Richmond is ailing

MARKETBEAT:

• List of troubled properties
• Industrial
• Office
• Retail

The commercial real estate market in the Richmond area is ailing and likely to get worse, much like the rest of the country.

Twenty-three properties here -- ranging from hotels to mixed-used developments, apartments and shopping centers -- are in financial distress, according to Real Capital Analytics, a commercial real estate research and consulting firm based in New York.

A year ago, only five properties locally were troubled assets.

A surge of foreclosures of commercial properties in the Richmond area and nationwide is expected in the next year, as borrowers face loans coming due and can find no source of refinancing.

"It's a universal problem," said Stevens N. Gentil, chairman of Grubb & Ellis/Harrison & Bates, a commercial real estate firm in Richmond.

"There's a high probability that any property acquired, financed and developed since 2003 is over-financed," he said.

In most cases, property values have dropped precipitously and borrowers owe more than their properties are worth.

What's more, the commercial real estate problem isn't limited to new developments. Many stores, offices, hotels and town-house projects built 30 years ago were refinanced -- and over-leveraged -- during the boom.

"It's not like in the early 1990s when Richmond was overbuilt and we slugged it out over three or four years," Gentil said. Builders stopped constructing then and supply eventually caught up with demand.

"This time around, the national economy is worse and we have some bigger, more fundamental issues," he said. "The market came back quickly in the '90s. Let's hope that is the situation now."

Others are less optimistic.

"I think it will get worse before it gets better," said Jessica Ruderman, a senior analyst with Real Capital Analytics. "Banks are still not lending money. Buyers and lenders don't agree on prices."

C. Lee Warfield III, executive vice president at Thalhimer/Cushman & Wakefield real estate brokerage in Richmond, said he expects to see similar deterioration in the Richmond area.

Eight percent of the commercial properties here are in distress, while 17 percent are in financial trouble nationally, according to Real Capital Analytics. By comparison, 24 percent of properties in Las Vegas are in danger of foreclosure.

"We're no different than the rest of the country, although we haven't seen the extreme ups and downs in values like in Florida and other parts of the country," Warfield said.

Here's some of what is happening now:

• Steven Kent Hotel in Petersburg is in foreclosure and scheduled to be auctioned this month.

• Hampton Farms, a 38-acre residential project off Hull Street Road in western Chesterfield County, was repossessed by the lender in August. The developer built roads and installed water and sewer lines but couldn't drum up interest from home builders.

• The Sheraton Richmond West hotel in Henrico has a receiver who was appointed until the lender and borrower can come to terms.

"We are definitely open for business," said Tico Bevier with ARL Richmond Management, the receiver. "The property has not been foreclosed," he said, declining to elaborate. "We look forward to continuing our service."

• Midlothian Town Center, a mixed-use project on 35 acres off Winterfield Road in Chesterfield, never got off the ground. An executive at James Doran Co., the project's Charleston, S.C.-based developer, declined to comment.

• One of the largest mixed-use projects for the area, Magnolia Green on nearly 1,900 acres in Chesterfield County, was repossessed in May.

. . .

The commercial real estate market operated much like the residential market, which brought the economy down.

Interest rates were low; credit was easy and little if any equity was required to get a loan. Loans on commercial properties were pooled together into securities -- commercial mortgage-backed securities -- and sold to investors, much like residential loans.

The mortgage-backed securities market has dried up totally since peaking in October 2007. Banks are requiring more equity than they were two years ago -- typically at least 30 percent -- and even then, few are lending on commercial projects, real estate experts say.

Unlike most residential loans, which are paid over 30 years, commercial loans typically are five-, sevenor 10-year notes -- and those notes are coming due.

By the end of 2012, $153 billion of commercial loans are coming due and nearly $100 billion will have trouble refinancing, according to Deutsche Bank.

"One constantly recurring fear is that another round of losses will result from the collapse of commercial real estate," according to a Wells Fargo Securities report this week subtitled "The Next Shoe to Drop?"

"The sharpest job losses since the Great Depression have sent demand for commercial properties reeling. Rising vacancy rates are cutting into rental income and making it much more difficult to sell properties."

Values of commercial properties nationwide have dropped 30 percent from two years ago, and sales have plunged 85 percent in the same time period -- to the lowest volume since Real Capital Analytics began tracking the data in 2001.

The Richmond area is showing similar declines, according the research company.

"As of now, most [troubled assets] are not actually being taken back by the lenders, because that would force them to mark down the value of the loan on their books," said Ben Thypin, a market analyst for Real Capital Analytics.

"Most lenders are doing what is being referred to as 'extend and pretend' in which they try to work it out with borrower by modifying and extending the loan or finding a new buyer."

Contact Carol Hazard at (804) 775-8023 or .

Staff writer John Reid Blackwell contributed to this report.