As published in Scotsman Guide's Commercial Edition, June 2012.
Across the country, the commercial real estate sector is showing signs of recovery, and prices are gradually returning to pre-recession levels in some metropolitan areas. Still, when buyers are shopping for investments, they may be tempted to explore bargains in the distressed market — where they can be in a better position to negotiate.
This past year, sales of distressed office, industrial, retail and multifamily properties totaled $21 billion, up from $20.6 billion in 2010, according to CoStar Group data. Although the volume of distressed-property transactions fell from 30.1 percent in January 2011 to 21.1 percent this past January, this volume still is substantially elevated compared to the 2008 volume that made up less than 3 percent of the year’s total sales volume, according to the data.
With this noticeable interest in the market, a commercial mortgage broker must be receptive to clients’ needs, whether those clients are bargain hunters or just owners who are looking to find refinancing for distressed properties. It’s also essential to understand the factors that control the pricing and marketability of distressed properties and take a creative approach in dealing with this niche.
Employing a one-size-fits-all approach in dealing with distressed properties doesn’t work. A commercial mortgage broker must work with the owner of a distressed property to make sure that the property is eligible for financing. One way to do so is to look beyond the property’s current use and try to imagine what it could become. In other words, just because a property comes with zoning challenges or is dilapidated in appearance shouldn’t relegate it to the description of an “industrial factory for sale.”
A savvy commercial mortgage broker can recommend ways to convert a nonconforming property into a thriving business — which will increase its eligibility for refinancing. With this approach, a 20-year-old bowling alley, for example, is not restricted to this identity for the next 20 years. With the right zoning, a bowling alley could become a mini-mall, an office complex or an indoor miniature golf course.
A commercial mortgage broker also must act as a stakeholder in the client’s company. When dealing with a distressed property, make sure your client has all the details of a property’s size assessment, as well as proposed alternatives, pricing set points, marketing plans, etc.
Furthermore, it’s important to understand the owner’s connections with developers, governmental buying agencies, municipal and state governments and consulting firms. These connections can come into play in the pricing and negotiation process — especially if environmental considerations crop up.
Keep in mind that arranging financing or refinancing for these challenging properties can be time-consuming — particularly if a property has complexities with zoning issues or environmental regulations.
The distressed property market offers many opportunities that commercial mortgage brokers can capitalize on. A once-distressed property can be turned around and utilized in a way that makes it easier to refinance or sell when needed. In addition, the community benefits from a healthier industrial and business base, more revenue, and enhanced aesthetics.
Fred Massa is the CEO and founder of Industrial Concepts Brokerage LLC (icbllc.com), with offices in Swampscott, Mass., and Medford, Mass. ICB specializes in industrial and commercial real estate properties, particularly those that are considered difficult to market or nonconforming. Reach Massa at email@example.com or (617) 459-4094.