Bank consolidations to slow CRE recovery
April 15, 2010 | Mark Thomton | Print Article | Email this Article
While the worst of the recession may be over, fundamental problems will persist in the financial and commercial real estate markets well into 2011, agreed a panel of experts.
L-R: Vince Laughlin, MB Financial Bank; Colin Kihnke, CMK Companies, Ltd.; Paul Lundstedt, Grubb & Ellis; George Good, CB Richard Ellis.
Many economists and business leaders are looking at early economic indicators for optimism that the recession is over, but it will not be until the second half of 2011 that the market resembles any kind of normalcy, said Vince Laughlin, manager of the commercial real estate department for MB Financial Bank, at a seminar hosted by North Park University in Chicago.
“The bad news is the good news,” said Laughlin. “The bad news is there is not a lot of capital out there to make new commercial real estate loans. The good news is there is not a lot of demand.”
Laughlin said that the meltdown of the financial markets was unprecedented and banks were forced to shift capital to deteriorating portfolios to keep them afloat. Some banks will be able to make this work by extending loans and propping up portfolios with cash, but many will not. As 2010 unfolds more banks will fail as bad loans eventually overwhelm them.
“The FDIC is hiring 500 people out in Schaumburg,” said Laughlin. “They are just getting warmed up. The landscape will be separated into two groups: banks with capital and banks without.”
This could mean more trouble for the commercial real estate market moving forward, because the banks that do have capital will not turn to real estate for investment, but rather set their sights on acquiring other financial institutions, said Laughlin.
Laughlin said that MB Financial has roughly $1.7 billion in real estate investments and $800 million could be classified as “problematic.”
“That doesn’t mean they are bad loans,” he added. “We just have to keep a close eye on them. The next few years banks will focus on sorting out their portfolios. That is just the reality.”
The Chicago condo market is still working through issues with oversupply and depreciating value, but the worst may be past.
“This last quarter (1Q10) was our best quarter in three years,” said Colin Kihnke, president of CMK Companies, Ltd. “Chicago still has about 2,000 unsold units in the market today. That is a lot of product, but it is manageable”
In 2005, at the height of the construction boom, developers added 9,000 units in Chicago. Of those units, 8,000 were sold upon delivery. The construction industry has slanted entirely in the other direction as the market added less than 1,200 units in 2008 and 2009. The average for Chicago is 2,200-2,300 new units each year.
“The biggest story of the last two years is how we removed 3,600 units from our database,” said Kihnke. “Lenders simply wouldn’t do deals, but if you take those units out, it puts us in a relatively good place.”
In the future, condo construction will continue to dwindle as banks are not currently making loans on large-scale projects.
2010 will see 1,200 units delivered, of which half are sold, said Kihnke.
However, the market for 2011 and 2012 has 80 units and zero units in the pipeline respectively.
“Opportunities will be in condo conversions or small projects,” said Kihnke. “I’m optimistic that in 2012 or 2013 I will be able to break ground on a new project.”
The retail market has been hit hard during the past two years as investment sales plunged 80 percent from 2007 to 2009 and rental rates are likely down 30 percent from market highs, said George Good, executive vice president of CB Richard Ellis.
If there is a positive to found it is that retailers themselves have become stronger and will emerge as more efficient businesses, said Good.
“Walmart had declining same-store sales in November, but the company still saw profits increase,” said Good. “They have streamlined and made their business more efficient. The retailers that have survived have improved.”
Good expects the market to hit bottom this year and slowly work its way back up.
The office market has experienced some positive activity as well.
“This year we have had $100 million in transaction in the suburbs already,” said Paul Lundstedt, executive vice president and director for Institutional Capital Markets at Grubb & Ellis. “Last year we did $120 million total.”
Tags | CB Richard Ellis, Chicago, finance, Grubb & Ellis, Retail
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