Renegotiated loans will ease fallout, one broker says

WEST PALM BEACH, Fla. – May 6, 2009 – When the taps went dry for a few hours at the Comeau Building in downtown West Palm Beach in late March, most tenants could shrug off the inconvenience.

Not technology entrepreneur Sean Brown. He relies on the water in the office building’s rooftop chiller to keep his computer servers cool, and he was none too pleased to learn that the city of West Palm Beach had shut off the water because owner NCP Holdings hadn’t paid its bill.

Brown grew more frustrated when he found that Florida Public Utilities had turned off natural gas to the building for a couple of days, again because the landlord hadn’t paid its bill. Brown needs the building’s gas-powered rooftop generator to keep his company, Clear Link Networks, operating if the power goes out.

Many observers predict the foreclosure action against the historic Comeau Building will prove just the start of a wave of defaults by commercial landlords in Palm Beach County. While most tales of mortgage foreclosures have centered on homeowners and condo developers, Brown’s troubles show how disruptive foreclosures against commercial properties can be.

Bank of America in March filed a $13 million foreclosure action against Chicago-based NCP Holdings. The court file includes dunning letters from Citizens Property Insurance Corp. for an unpaid premium and from a janitorial firm for nearly $15,000 in unpaid cleaning services.

Brown leases 1,150 square feet at the Comeau Building, and he says leaving isn’t an option. Finding office space with fiber optic connections, a chiller and a generator could take months.

“My business is not just one you can pack in a truck and move somewhere else,” Brown says.

Doomsayers expect a flood of commercial real estate foreclosures as property values fall, layoffs mount and vacancy rates soar.

The reason is simple, they say: Worried, tight-fisted consumers aren’t buying things the way they used to. If retailers can’t sell things, they can’t pay the rent for their space. If they can’t pay the rent, the landlord can’t pay the mortgage. If the bank doesn’t get paid, it sues for foreclosure.

So far, though, mortgage defaults by owners of offices, warehouses and retail properties in Palm Beach County have amounted to little more than a trickle.

Foreclosure activity remains centered on the residential market. During the first three months of 2009, more than 5,000 Palm Beach County homes were in some state of foreclosure, according to Irvine, Calif.-based research firm RealtyTrac.

By contrast, lenders have filed foreclosures against only about a dozen nonresidential properties worth $1 million or more in recent months, according to Palm Beach Post research.

In the highest-profile default so far, J.P. Morgan Chase slapped Palm Beach Mall with a foreclosure suit. The struggling mall’s owner, Simon Property Group, stopped repaying its $55 million loan, the bank says.

Other defaults include lower-profile properties such as a 137,000-square-foot call center at 750 Park of Commerce Drive in Boca Raton, the 100,000-square-foot Courthouse Commons office building in downtown West Palm Beach and a 90-room motel at 11360 U.S. Highway 1 in Palm Beach Gardens.

Some of the foreclosures come as little surprise. The Boca Raton call center has sat empty since former tenant Office Depot closed its operation there in 2006.

And the owners of Palm Beach Mall and the Comeau Building were in the midst of pushing out tenants in anticipation of major renovations when the credit crunch hit and the recession deepened. Simon had planned to gut Palm Beach Mall and turn it into an outdoor shopping center. NCP Holdings aimed to transform the Comeau Building from offices into a hotel.

But some of the foreclosures raised eyebrows – such as the Publix-anchored Quantum Village shopping center at 1005 Gateway Blvd. in Boynton Beach. Usually, Publix-anchored centers thrive in bad times, thanks to the supermarket chain’s strength.

“You don’t see too many Publix centers going south,” says Bill Reichel of Reichel Realty & Investments in West Palm Beach.

But more than a third of the 93,000-square-foot Quantum Village’s space is vacant, according to the CoStar and LoopNet commercial property Web sites. BankAtlantic in March filed a foreclosure action against the property’s owner, Monroe’s Prestige Group.

Because the commercial real estate market typically follows housing in and out of downturns, commercial real estate brokers are gearing up for a flood of foreclosures. So far, though, most of the work has centered on residential developments.

“Every commercial broker today has a workout division,” Reichel says. “But I haven’t seen that much real significant commercial foreclosure yet. I say ‘yet’ because everybody’s anticipating it.”

In one example of the troubles to come, Chicago-based mall owner General Growth Properties on April 16 filed one of the biggest bankruptcies in U.S. history. While its one Palm Beach County property, Mizner Park in Boca Raton, was not part of the bankruptcy, many see its reorganization as a troubling omen.

“The commercial real estate landscape is teetering on the brink of disaster,” says New York real estate attorney Edward Mermelstein.

Why so glum? Here are some of the forces that can lead to more defaults:

• Falling property values: Prices for commercial properties peaked in 2007. Since then, prices have plunged. In one example, the office building at 980 N. Federal Highway in Boca Raton changed hands in April for $20 million, according to CB Richard Ellis. Previous sale price: $26.5 million.

• A weak economy: Jobless rates in Palm Beach County have tripled in the past three years, according to the Florida Agency for Workforce Innovation. That portends slack demand for commercial space.

• Falling rental income: Vacancy rates in Palm Beach County’s office and industrial space also have tripled in the past three years, according to CB Richard Ellis. That means fewer tenants paying rent.

• The credit crunch: With values off and lenders hunkering down, landlords can’t refinance their way out of trouble. Even a solid landlord gets squeezed if it can’t find new financing when an old loan comes due, says Neil Merin of NAI/Merin Hunter Codman in West Palm Beach.

“They may actually be doing quite well and paying their bills – it’s just that their loan is due,” Merin says.

Despite such concern about a coming collapse in commercial real estate, some predict the foreclosure fallout will be slight.

Scott O’Donnell, a broker at CB Richard Ellis in Boca Raton, says lenders have little choice but to renegotiate loan terms for troubled borrowers. As a result, he foresees few foreclosure fire sales – and disappointment for bargain hunters who hope to snap up great deals.

“A lot of buyers are starting to come to the conclusion that there will be far fewer of those opportunities coming down the pike than they thought,” he says.

Copyright © 2009 The Palm Beach Post, Fla., Jeff Ostrowski. Distributed by McClatchy-Tribune Information Services.

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