American Banker looks at what banks should expect as they come to increasingly own commercial real estate. Many banks may want to sell rather than dealing with the headaches of being landlords--especially given the volume of properties we may end up seeing default.
As the story explains:
Lenders can avoid coming into possession of properties by selling loans headed for trouble.
"There are some banks who would just rather sell their loans and get the loans off the books and not have to deal with it," said Jeffrey Lenobel, a partner with Schulte Roth & Zabel LLP.
"Lenders are generally not in the foreclosure mode because it's time-consuming, it's expensive, and then they obtain the property, and have to manage it, run it, lease it, sell it," he said. "They have to hire a managing agent. They have to deal with the economics of the property. If it's an office building, they have to lease it. … If it's a hotel, you have to enter into a franchise or operating arrangement."
The problem is that with values so depressed, banks selling assets in this climate risk taking huge losses. So banks face a tough choice. You can sell now and take bargain-basement pricing. Or you can gut it out--perhaps by bringing in a third-party manager to help keep the asset going--and wait until you can sell into a better investment sales climate.
David Gibbons, former deputy comptroller and chief credit officer at the Office of the Comptroller of the Currency, now a special adviser to Promontory Financial Group LLC, said that though holding onto foreclosed property risks price drops, "depending on your timing, you could be dumping your property at very low prices." That happened in "the early '90s when banks acquired a lot of 'other real estate owned' and sold it and eliminated problems from their balance sheets," but "then somebody else made money because the market stabilized and got better."
Lenders are "going to try to win back as much of the value that they can for their loan, and if that value is abnormally low in a nontransactional environment for the next two years, it may behoove them to … hold these things" for perhaps "two to three years."
Here are some other news and notes on retail and retail real estate from around the Web today.
- ICSC released the ICSC-Goldman Sachs weekly same-store sales stats. RetailSails then analyzed the results. There have been two straight weeks with year over year and week over week gains. Despite this, the expectation is June same-store sales--which are reported Thursday--will show about a 5 percent drop compared with 2008. Another look at retailers from Forbes examines how, unsurprisingly, low-end retailers are thriving and luxury retailers are struggling. And the New York Times explored how jewelry stores have been hit by the downturn.
- Seeking Alpha noted that General Growth is now thinking its reorganization will last into 2010. The process has dragged some because of the challenges the bankruptcy has faced from some creditors. But the size and complexity of GGP's operations also is slowing things down. Meanwhile, Reuters reported that the company must pay $3 million in back interest on debt on two of its Las Vegas malls.
- According to Crain's New York, Kainos Partners Holding Co., a major Dunkin' Donuts franchisee with 56 locations, filed for Chapter 11.
- Can you say graft? Or, as IKEA put it, "the unpredictability of the administrative processes." Business Week looks at how IKEA is fed up with business conditions in Russia. It has halted its expansion there.
- According to Reuters, the spa business is booming and some analysts are saying the business is "recession proof." According to the story, "There were more than 160 million visits to U.S. spas in 2008, up nearly 16 percent from the previous year, while industry revenue grew almost 18 percent to $12.8 billion, a study by the International Spa Association showed." Have those figures held up in 2009? The story doesn't say. And you would think given the difficulty of business conditions, no one would be throwing the phrase "recession proof" around, especially since the story notes that because of the expansion in spas, revenue per location was actually flat last year. How about saying "recession resistant" instead?