The Business Press: Defaults, foreclosures loom on commercial real estate front

By Chris H. Sieroty 

Contributing Writer

As the collapse of the housing market in Inland Southern California slowly begins to stabilize, economists and real estate analysts are concerned that increased foreclosures in the commercial real estate market could prolong the region’s efforts to recover from the current recession.

The problem was expected to get worse as a large number of loans approach their renewal date over the next few years and companies and individuals will no longer be able to meet the original loan conditions or refinance.

“The commercial real estate market has already burst beginning more than a year ago,” said Christopher Thornberg, an economist and principal with Beacon Economics. “The key to commercial real estate is that it’s a very slow pop, and it can take years to break.”

He said the major problem facing the local commercial real estate market was cash flow versus debt servicing as property prices in the two-county region were already too high to begin with. But Thornberg added that debt service is relatively cheap at the moment, and much of the debt on commercial properties “is on a three- or four-year balloon,” with problems expected to occur when the loans start to come due.The region’s commercial market experienced a big decline in market conditions in the first quarter of the year, according to a CoStar Inland Empire report. The vacancy rate jumped from 7 percent in the fourth quarter of 2008 to 8.1 percent in the first quarter of 2009, while net absorption was negative 1.37 million square feet and vacant space increased by 416,856 square feet, according to the report.The region’s net absorption rate turned dramatically from the fourth quarter of 2008 from a positive 760,304 square feet. The report attributed the increase to large retailers vacating space in the first quarter of 2009, including Mervyn’s, which vacated approximately 245,000 square feet of commercial space during the first quarter.

“Vacancy rates are way up in the Inland Empire,” Thornberg said. “That’s a big problem, because retail was overbuilt. Retail is worse than other parts of the market, but they are equally bad off. The office market is tiny and realistically will bounce back. Warehousing is an issue. But warehousing is going to be (all right) as trade flow starts up again, which eventually it will.”

Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington, D.C.-based trade group for banks and other financial institutions, said about $1.3 trillion in commercial real estate loans nationwide are coming due between this year and 2013.

“It has become the next round of bad news,” Talbott told The Business Press in a telephone interview. “A decline in property values along with fewer potential tenants looking for space translates into a decline in income for landlords and higher vacancy rates which have combined to create a perfect storm for commercial real estate.”

He cautioned that a commercial mortgage collapse could prolong the region’s recovery. Increases in foreclosures, bankruptcies and falling real estate prices could lead to additional bank losses, while many financial institutions have been setting aside additional resources to cover loan losses from mortgage and credit card defaults.

Additional defaults on commercial properties could lead to additional taxpayer assistance for regional and local banks, he said.

“It’s going to be difficult to refinance those loans because underwriting standards have tightened up and because of the credit crunch banks are not willing to lend as they have in the past,” Talbott said. “There is 3.3 trillion square feet of commercial real estate nationwide. The delinquency rate was 1.8 percent at the end of 2008, but expect delinquency rates to rise this year.”

The reality of bankruptcies and foreclosures is already on display in San Bernardino and Riverside counties.

On April 16, General Growth Properties filed for bankruptcy protection. Based in Chicago, the company, which owns 158 malls nationwide, including Redlands Mall, Galleria at Tyler in Riverside, Montclair Plaza and Moreno Valley Mall, was forced into bankruptcy when it was unable to renegotiate its debts as they came due.

“We are starting to see some notices of default throughout the region,” said Eric Frickle, of Eric Conrad Frickle Commercial Realty Services. “My opinion is it’s going to get worse in the Inland Empire before it gets better, because I just don’t think all the problems have worked their way through the pipeline yet.”

According to figures compiled by RealtyTrac Inc., 1,715 commercial properties in Riverside and San Bernardino were in various stages of foreclosure. Most of the commercial properties listed by the firm were described as defaults — 675 in Riverside County and 512 in San Bernardino County — which were about to be foreclosed.

The downturn in the commercial market has forced brokerage firms to seek additional financing to meet debt payments.

CB Richard Ellis Inc., the world’s largest commercial property brokerage, raised $450 million June 19 as part of the firm’s effort to cover loans to stay solvent during the real estate downturn. Based in Los Angeles, the company raised the money by selling bonds but was forced to offer a high rate to attract investors. The bonds, which mature in 2017, have a yield of 11.625 percent.

The company will use the proceeds of the bond sale, along with $150 million raised from a common stock sale on June 10, “for the repayment of some of its outstanding (debt) under its credit agreement.”

Frickle said lenders have tried to work things out and modify loans before properties go into foreclosure.

“We are starting to see banks trying to renegotiate (loans) because they don’t want to take this stuff back and recognize those losses if possible,” he said.

In terms of the commercial office market, Corona has experienced a construction boom in recent years when housing-related industries were rapidly expanding in the area. Today, the Corona office market contains about 3.9 million square feet of which some 1.25 million, or 32 percent, is vacant.

To put the problem in perspective, Frickle said, in 2005, which was a banner year, the net absorption rate was 340,000 square feet.

“When you look at the historical average absorption over a longer time frame (five to 10 years), the extent of the problem becomes more apparent,” he said. “The excessive vacancy rate will translate into additional defaults in the future, as more construction loans for empty new buildings come due in the next year. This will have a trickle-down effect on other properties, hitting those who bought late in the cycle the hardest as they struggle to make debt service with lower rents that result from landlords competing for tenants.”

Renegotiating leases

As vacancy rates continue to increase, some landlords have been willing to renegotiate leases with national and small-business tenants to keep commercial space occupied.

“We have been very busy renegotiating current lease agreements to take advantage of the depressed market,” said David Salazar, managing director of Cresa Partners in Ontario. “It began about nine months ago when companies began to realize the recession was real and needed to find a way to reduce costs.”

Salazar explained that some companies that may have two years left on a current lease at 40 cents a square foot have been able to reduce the rent to 30 cents a square foot by extending the lease by five years.

“It’s a win-win for businesses and landlords,” he said. “We recently worked with BBSI and we were able to adjust their rent by 25 percent, while extending their lease and acquiring additional space.”

Based in Vancouver, Wash., Barret Business Services Inc., or BBSI, is a human resources management company with offices in Ontario, San Bernardino and Temecula. Matt Maxwell, BBSI’s branch manager in Ontario, said his office hired Cresa Partners to renegotiate its lease when they wanted to acquire an additional 2,000 square feet to add a training center for their clients.

“We felt that expanding our business without revisiting what we were spending in this economy would not be wise,” Maxwell said. “We were paying about $1.80 per square foot, but to take the suite over, we wanted to lower our rate. In the end, we are paying about $1.30 per square foot on a three-year lease.”

In the High Desert, a number of businesses and landlords have reached updated lease agreements. But requirements to renegotiate a lease have been tightened because of claims of fraud by landlords who say businesses owners are trying to take advantage of a depressed commercial real estate market to receive better lease terms, said Donald Brown, president of the Lee & Associates office in Victorville.

“Probably 90 percent of the companies wanting to renegotiate are not in financial stress, but are just not wanting to honor their leases,” Brown said. “It’s unfortunate that they are trying to do this at the landlord’s expense.”

Brown said that for a rent-reduction application, many landlords are asking financial information going back two years.

But as analysts worry about increased foreclosures and bankruptcies, there are some signs of recovery in the Inland commercial real estate market.

“We expect the economy to begin recovering in the third or fourth quarter of this year,” said Brown, whose office represents properties from the Cajon Pass to the Nevada state line. “Right now our leasing agents are talking with potential clients who are looking to take advantage of the (down) market to lease property. It’s a tenant market right now, and we are advising them to take advantage of the best rates in the region.”

Calpers raises private equity, venture allocation

By Chris H. Sieroty

LOS ANGELES – The board of the California Public Employees’ Retirement System, the nation’s largest public pension fund, voted on Monday to let its investment staff increase the fund’s asset allocation for private equity and venture capital investments and to reduce stock holdings.

The board of Calpers voted to raise the fund’s Alternative Investment target allocation for private equity and venture capital by 4 percent to 14 percent of its recommended portfolio allocation.

“This is not intended to be a long-range strategy but reflects our preference for higher liquidity and moderate risk, as well as the flexibility to respond to challenges and opportunities in the markets,” said George Diehr, chair of the CalPERS Investment Committee. “Our investment officers will follow these guidelines as we position ourselves for short-term investment opportunities over the next year or so.”

Calpers’ board reduced the fund’s Global Equity target allocation to 49 percent from 56 percent of its portfolio allocation. The target allocation for the fund’s cash was increased to 2 percent from zero and the target allocation for its fixed- income investments was raised to 20 percent from 19 percent.

The fund’s real estate allocation was held steady at 10 percent and its allocation for inflation-linked assets was left unchanged at 5 percent.

“All investors in every sector have experienced unprecedented devaluations as a result of systemic threats to financial institutions and major companies,” said Priya Mathur, vice chair of the CalPERS Investment Committee. “We reassessed our strategic investment approach, incorporating current assumptions about the market that we didn’t have 18 months ago.”

As of June 12, Calpers was valued at $183 billion.


Sports News & Notes

UPDATE: Harvey released by Kansas City T-Bones

KANSAS CITY, Kan., – Former Kansas City Royals All-Star Ken Harvey was released June 2 by the Kansas City T-Bones.

Harvey, who is hitting .351 on the season with one homer and seven runs batted in, was released along with John Urick. Harvey was instrumental in last year’s run for the Northern League championship winning T-Bones and was re-signed during the offseason.

But he and other members of the lineup have been in a prolonged slump. Replacing Harvey is Greg Jacobs, who played for the T-Bones early in the season last year.

“It was a tough relase,” T-Bones manager Andy McCauley told the Kansas City Star. “The Northern League has certain roster parameters and there’s a salary cap. We did it to afford Greg Jacobs and Neb Brown. It came down to a veteran pinch and a numbers cruch with the cap, as it does so often.

“Ken Harvey is one of the best players in the league,” McCauley told the Star. “But in order to get two for one, it’s a tradeoff we had to make. We get more flexibility as Neb can play left and Ken is pretty much relegated to first base and DH. Of course, he did it better than anyone in the league. He was just the odd man out in this situation. He’s a great guy and he’ll catch on somewhere else.”

Harvey, a 1995 Beverly Hills High School graduate, hit .341 with five home runs in August to help lead the T-Bones to the 2008 Northern League championship. In 11 games this season, Harvey, who plays first base, is batting .351 with three doubles, a home run and five RBIs.

He was originally drafted in the fifth round by the Kansas City Royals in 1999 amateur draft and was a member of the organization until he was released in 2005. He was named to the 2004 American League All-Star team as a Royal

Harvey played in 271 major league games with the Royals from 2001 to 2005. He is a career .274 hitter at the major league level with 27 home runs, including a career-high 13 each in 2003 and 2004.  He has also compiled 126 RBI throughout his big league career.

On Dec. 8, 2006, Harvey signed a minor league contract with the Minnesota Twins with an invitation to spring training. He opted for minor league free agency on Nov. 3, 2007.

He signed with the T-Bones on June 11, 2008.

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Skaggs taken by L.A. Angeles.

SANTA MONICA – Tyler Skaggs of Santa Monica High School was selected by the Los Angeles Angels with the 40th pick in the Major League Baseball draft on Tuesday. Skaggs, who had been considered a possible first round selection, was take by the Angels in the compensation round and was the team’s third draft pick of the day.

Skaggs, who turns 18 on July 13, is 6-5, 180 pounds with a fastball in the 90s and a quality curve. Hampered by an ankle injury, he was 2-3 with a 1.60 ERA as a senior, striking out 12 three times in nine appearances. He was the Ocean League MVP as a junior. 

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UPDATE: Santa Monica baseball’s Duron resigns

SANTA MONICA – Rob Duron, head coach of Santa Monica High School’s varsity baseball team, confirmed Monday that he had resigned his position effective last month. Duron, who has been a teacher at Santa Monica since 1987, said he submitted a letter of resignation to athletic director Norm Lacy thanking him for all his support and turned in his keys two days after his team’s playoff loss. 

On May 26, the Vikings lost 3-1 to Los Altos in the second round of the Division III California Interscholastic Federation Southern Section playoffs. 

Duron took issue with Lacy’s statement that coaching was a hobby for many coaches at the high school and that he was burned out after two years as head baseball coach.

“I’m not burned out,” he said. “Coaching is a full-time job that you don’t get paid a lot of money to do. You do it because you want to teach the kids something that you’ve learned.”

In an interview last week, Lacy said Duron had just resigned. “He had been under a lot of pressure, spent a lot of time coaching and didn’t get paid a lot. It’s a burn out factor,” he said. “It’s unfortunate. Parents have to remember it’s high school sports. This is not professional sports. Coaching is a hobby for many of us that we do in addition to teaching.” 

Lacy’s comments followed a number of complaints he received from parents and boosters, which included claims of verbal abuse and calls for Duron to be replaced. 

Earlier this year, Dan Ramos, Santa Monica’s assistant softball coach, wrote a letter to the editor of the Santa Monica Daily Press criticizing Duron and writing that “they should of got rid of this guy a long time ago.” The Santa Monica Mirror reported that Ramos had applied for the job when Kevin Brockway was chosen in 2004.

Duron said the situation at Santa Monica just “got worse and worse” during the season. He replaced Brockway, who resigned in 2007 after the Vikings lost to Charter Oak, 7-1, in the Division 4 finals at Dodger Stadium to take an assistant coaching position with West Los Angeles College. In two years, Duron was 34-27, 16-4 in the Ocean League. 

This year, Santa Monica finished in a tie for third with Hawthorne at 6-4 in the Ocean League, but defeated the Cougars, 6-5, in an extra game to reach the CIF playoffs. Two of Santa Monica’s league losses were to Beverly Hills, giving Vonzie Paysinger his first season sweep of the Vikings in 11 years as head coach. 

Beverly Hills, 12-15, 8-2, captured the Ocean League regular season title, before losing in the first round of the CIF playoffs, 9-8, to Bell Gardens.

“I think Santa Monica is losing a good coach,” Paysinger said. “In his two years Santa Monica was 16-4. The administrations and parents were not happy with that record. I don’t think they will ever be happy. It’s sad that he was forced to resign.”

Duron declined to comment on Paysinger’s remarks, only saying that Paysinger did a great job with Beverly Hills this season and should be considered for coach of the year in the Ocean League.

A year ago Samohi went 10-0 in the Ocean League but lost a first round playoff game, 3-2, to Diamond Ranch High School of Pomona. There is no indication of who the new coach will be, but Lacy said a search for Duron’s replacement has begun and several current coaches at Santa Monica have applied for the position.

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Rocchio Released By Clearwater 

CLEARWATER, Fla. – Joe Rocchio, a 2003 Beverly High graduate, has been released by the Clearwater Threshers, a minor league affiliate of the Philadelphia Phillies. 

He was drafted by the Phillies in the tenth round of the 2007 draft out of Cal State Northridge. Rocchio started the season with the Threshers in the Class A Florida State League and posted an 8.59 ERA in five appearances before being released on May 11. 

— By Chris H. Sieroty