While we continue to closely monitor the toll that residential foreclosures are taking on our home values, the long-feared second wave of economic trouble from all those deserted strip malls, office parks and industrial complexes across the land has so far failed to materialize.
For more than a year, analysts have been predicting that a tsunami of commercial foreclosures was imminent. A February report by the Congressional Oversight Panel warned that projected losses in the $200 billion to $300 billion range could threaten the economic recovery and swallow many small to midsize banks.
But so far at least, that wave has failed to break. Some say it never will.
Why? Well, a commercial foreclosure is a far different beast than its residential counterpart. For starters, unlike residential foreclosures, commercial foreclosures are usually contested. For example, in the seizing of a strip mall, lawyers for the developers, tenants and banks can keep a commercial filing in slo mo. Sometimes they even develop into civil suits that can drag on for ages.
In some cases, commercial lenders are placing these imperiled properties on life support through a practice known as "extend and pretend." Darron Kattan of Franklin Street Financial Partners in Tampa, Fla., told the St. Petersburg Times that lenders extend the loan, pretend that their values haven't collapsed and hope that the economy recovers enough to bail them out before the loans expire.
"They're not in a hurry to push the gas pedal on these foreclosures," he says.
Larry Richey, senior managing director of Cushman & Wakefield commercial real estate advisors in Tampa, told the Times that the long-predicted second wave won't ever break. That's because banks absorb higher losses when they foreclose on a strip mall than when they own a ranch home. These days, banks are in no mood to carry the added weight, not to mention the higher taxes and maintenance costs that accompany commercial foreclosures.
There's no question that commercial property values have taken a hit lately. The feds estimate that values have dropped 40 percent since early 2007. And no one is disputing that plenty of commercial loans are currently underwater. Patrick Kelly, managing director of Grubb & Ellis real estate advisors in Tampa, estimates that $1.5 trillion in commercial loans will come due over the next three years, loans that cannot be extended forever.
Fortunately, it has been in many lender's self-interest to modify commercial loans and make other accommodations to avoid foreclosure, in sharp contrast to their seeming lack of interest in residential loan mods. This slow-track approach, together with emerging signs of life in the commercial sector, has downgraded the economic threat from tsunami scale to something more manageable.
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