If banks had to recognize just how much their commercial property loans have fallen in value, there would be a lot more properties in foreclosure, says Ed Kearney, managing director of Kearney Commercial Realty/Sperry Van Ness in West Palm Beach, Fla.
But thanks to generous rule changes, they and their borrowers continue to operate as if little has changed since the market began sliding in 2008.
Maybe we should blame the accountants, says Kearney. In 2009, the Financial Accounting Standards Board suspended a requirement that banks to mark their assets to market value when preparing balance sheet reports. Why? The board said there was no market for troubled assets.
That’s not the situation today, says Kearney, a licensed broker who regularly fields calls from investors that are seeking office, retail and industrial properties. They are looking for owners that can no longer make payments or simply want to unload their buildings and land.
“So-called vulture funds have huge amounts of capital and are waiting to pounce on a property that can be bought at a low price,” says Kearney of Kearney Commercial Realty in West Palm Beach. “In any other real estate cycle, those investors would be very busy. But there are few deals to be found.”
Instead, property owners and their lenders continue to cooperate in the hope that property values will recover and bad loans will become good again, says Kearney of Sperry Van Ness. The accounting board has given banks a great deal of discretion when valuating assets in their financial reports. Even if recent sales of comparable properties show a decline in values, the banks can work their way around those figures.
Can the property owners survive? Vacancy rates are rising and that has slowed cash flow at many commercial properties, says Kearney. Owners in Palm Beach and other markets have responded by cutting operating costs and deferring capital improvements. But is that enough?
“At some point in time, there will be a day of reckoning,” says Kearney, who has seen several cycles in his 25 years in the real estate industry. “Some property owners will realize that they can no longer hang on and either take a loss on a sale or hand the keys to the banks.”
The banks don’t want that day to come, says Kearney of Kearney Commercial Realty. Rather than own commercial buildings, they are reworking loan agreements.
“Everyone is playing extend and pretend,” says Kearney, but when the market reality take over, this era will come to an end.”
About Edward Kearney and Sperry Van Ness
Edward Kearney is managing director of Kearney Commercial Realty Inc./Sperry Van Ness with an extensive background in various aspects of commercial real estate including investment analysis, landlord and tenant representation, and property tax abatement. SVN is a leading national brokerage firm that markets commercial real estate properties to an investment and brokerage community of more than 100,000. Kearney welcomes investors, brokers, and others with an interest in the Florida commercial real estate market to contact him today by calling 561-616-6262, or visiting http://www.svnpalmbeach.com for more information about the services he provides.
For more information about Edward Kearney and Kearney Commercial Realty Inc./Sperry Van Ness, please visit http://www.svnpalmbeach.com.
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