Attorney Trey Wilson - RL Wilson Law

31 December 2008

San Antonio Real Estate Not As Robust As We Thought -- Bexar County Commercial Foreclosures Soar

By Creighton A. Welch - Express-News

The amount of commercial foreclosures in Bexar County spiked in 2008, with 56 percent more postings than in 2007.

To put that in perspective, residential foreclosures jumped 24 percent in 2008. Although only 557 — or 5 percent — of the 11,300 foreclosure listings for 2008 were commercial properties, in 2007 there were only 356 commercial filings, according to data from Foreclosure Listing Service, a company that tracks and reports foreclosure postings in North and Central Texas counties.

The rise in foreclosures signals a slowdown in the local commercial market, which boomed in recent years. Construction of new space has slowed, and vacancies have begun to rise.

Next year likely won't get much better for commercial real estate, either. “It's obviously a topic of conversation, and it's something we're all kind of looking at and concerned about,” said Kimberly Gatley, senior vice president and director of research with NAI REOC Partners, a San Antonio commercial real estate company. “The consensus is that we will see some foreclosure increase in 2009, but we don't expect an avalanche.”

Properties most susceptible to foreclosures are those that can't refinance, buildings that have lost a large tenant or new properties that have trouble finding tenants, said Ernest Brown, executive vice president and managing director of Grubb & Ellis Co. in San Antonio.

Though bad, the numbers don't mean the downfall of commercial real estate. “Thankfully, this does not mean that the commercial property market is in big trouble,” said George Roddy, president of Addison-based Foreclosure Listing Service. He said most of the postings involved smaller, older buildings often in less desirable locations.

By far the biggest increase in the amount of postings came in the undeveloped land sector, which increased 227 percent, from 26 in 2007 to 85 this year.

“With the tremendous level of real estate growth seen in the area over the last few years, developers and speculators naturally were in the acquisition mode,” Roddy said. “Today, however, it's very difficult to get approved for lending, especially for new development. So, although the 227 percent surprised me, I did expect to see a marginal gain.”

The numbers are even worse for land tracts larger than 501 acres and tracts between 21 and 50 acres, in which foreclosure postings increased 1,000 percent and 1,300 percent, respectively. Foreclosure filings dropped in just one type of land, Roddy said. Postings of smaller tracts of 2 to 5 acres dropped 33 percent.

The commercial foreclosure market is subject to a kind of domino effect. If consumers don't spend money, businesses can't pay landlords, who then can't pay off loans. If a company downsizes, it doesn't need its office space, and landlords are left with too much vacancy to pay debt.

“Depending on how long this recession lasts, it's going to start impacting the tenants first. And when the tenants start to default, the landlords are going to have to figure out what to do,” said Gatley, of NAI REOC Partners. “It is all dependent on their individual loan structures. I'm watching some of the smaller unanchored retail centers. Their ability to lease up has been quite a struggle.”

Retail foreclosure postings increased 55 percent, from 33 in 2007 to 51 this year, and that's an area that could continue to increase. “I expect to see more postings of retail centers and buildings over the next year due to the sagging economic conditions,” Roddy said.

The biggest group of foreclosure postings was “miscellaneous” buildings, which made up 62 percent of the commercial postings. The amount of postings increased 55 percent, from 222 in 2007 to 345 this year.

“Smaller companies and mom-and-pop retailers occupy much of this miscellaneous commercial space, and these businesses are among the first to feel the sting of today's changing economic climate,” Roddy said.

Office buildings, which made up just 5 percent of the foreclosure market, saw a 63 percent increase in postings, from 16 to 26. Apartments made up just 6 percent of all commercial postings, and the 33 postings this year were 27 percent more than in 2007. Industrial buildings were the only sector in which postings declined, dropping 48 percent from 33 in 2007 to 17 this year.

But the current environment doesn't yet compare with past real estate collapses. “It is significantly less than the late 1980s, no question,” said Brown, of Grubb & Ellis. “For the most part, in the 1980s it was a supply-side problem, but this time we didn't overbuild as much.”

When foreclosures rise, many owners try to unload their properties at discount prices. “We're not seeing any fire sales yet, which tells me that landlords are trying to weather the storm,” Gatley said.

Trey Wilson --Named By Scene in SA Magazine As One of San Antonio's Best Real Estate Litigation Attorneys -- September 2008 -- As voted on by peers