THURSDAY, FEBRUARY 26, 2009
by Nicholas CoburnDetroit |
| Nicholas Coburn |
While the economic downturn has clearly impacted nearly every region of the country and every facet of commercial real estate, residential development and vacant land in the metro Detroit area have been hit particularly hard.
As lenders find an increasing number of these assets reverting back to their books due to foreclosure, real estate investors may choose from an unprecedented level of distressed debt buy-side opportunities at pennies on the dollar. The real question of value, however, has never been so complex.
The challenges facing Southeastern MichiganThe challenges facing the Detroit area are certainly no secret. They have, in fact, been played out on the national stage.
From the state of the automotive industry to a market-wide economic downturn that has been both more severe and potentially longer lasting than in other states, real estate values in southeastern Michigan have been eroding at an unprecedented pace.
Of greatest concern are the countless broken residential developments that lie stagnant in various stages of incompletion, and are just now beginning to be liquidated by the project lenders and investors. These types of assets are potentially the most difficult to value. While banks continue to pursue the original developers for their personal guarantees, they often neglect the ongoing care of the real estate asset, not placing it within the hands of a receiver or asset manager as they would with a cash-flowing asset. These development projects unfortunately continue to lose tremendous value in real time.
Expiring entitlements, changing municipal sentiment and partially completed horizontal and vertical construction all represent the attributes of project value that must be maintained for an eventual sale to an opportunity buyer. This level of asset management, however, is not widespread and, as a result, values continue to freefall.
Additionally, many of these assets could benefit greatly from a small current investment to refresh and/or re-stabilize the expired or outdated entitlements, or to provide some critical cost-to-complete dollars to maximize the return from a distressed asset sale - funds that banks are unable or unwilling to commit to already defaulted properties.
To the distressed asset purchaser, understanding the exact state of the project, including what events have or have not transpired during the asset's recent period of distress, is key to finding real value.
Opportunities exist - but investors should have a full understanding of the risks and rewards for each individual asset and, perhaps equally important, a full understanding of the market's nuances to ascertain which investment provides an exit strategy and which is simply a path to continuing stagnation.
Is there value in Detroit?Evaluating commercial real estate in any particular market, and perhaps even more so in the Detroit area, requires an in-depth understanding of local geographic sentiment, sub-market inter-dynamics and other issues that can only be truly understood by experts who have lived and worked in the market.
As an example, a sizeable apartment project in one of Detroit's otherwise desirable suburbs has seen an unending cycle of defaulting owners and foreclosing lenders for the last 15 years, all of whom invested as "distressed buyers" and many eventually exiting the investment at a loss.
The real estate offering has all the trappings of an excellent investment: proximity to major highways, adjacent to some of the area's most affluent suburbs and the surface appearance of true value. The problem, which could only be known to a market operator, is the perception of this development as, at best, undesirable and, at worst, dangerous. The psychographics of this investment are intangible and they ring the death knell for investors who evaluate this offering solely by what is presented on paper.
We continue to see national investors pursuing metro Detroit assets because of the perceived value relative to the rest of the country. Unfortunately, they also continue to demonstrate that doing so without a seasoned local partner that is deeply ingrained in the market is a sure path to failure. Real estate value must always be understood at the most local of levels.
Similarly, while the opportunity to purchase broken residential developments with the potential for profit can be found in the Detroit area, the extraordinary number of these distressed investments available make them that much harder to value. After all, how does one find the base for valuation when seemingly all the assets have stagnated, and there are seemingly no market metrics to indicate growth or the ability to sell through a project?
We believe that the answer again lies at the ground level, and that only by deploying a team of development professionals to rethink the distressed asset purchase at the outset can a realistic exit strategy be formulated in today's confusing climate. Absent this discipline, many buyers who invest purely on a discounted basis will find that their bargain basement pricing might not seem so attractive in the coming months and years.
Uncertainty in this market makes extreme due diligence, multiple exit strategies and local market intelligence critical for all real estate investors. And these factors are in play in every market in the country, not just in the Motor City.
To buy or not to buyDespite the often gruesome statistics, there are many assets in Detroit well-positioned to increase in value. Those poised for a more rapid rebound are those closer to the epicenter of the region. During the residential building boom, developers strayed deep into the exurbs. These will be the last to rebound, and the potential for profitable disposition at this point is hardest to envision.
However, for those developments and land assets within our core markets, there are needles in this very large haystack.
These assets need to be vetted aggressively with investors delving into all imaginable issues, including the municipality's revised sentiment for the project, shifting master plans, the ability to revive partially completed construction, expiring development agreements and the competitive landscape in general. Though some buyers today are pursuing these distressed assets solely because on a "by-the-pound" basis their pricing seems so attractive, we believe that this is a temporary hiccup in the market, and unstudied purchases will result in unrealized value.
Additionally, and most importantly, investors should have access to ready capital in order to optimize profitable disposition. Distressed asset sales are generally transacting quickly, and the ability to close a transaction is often governed solely by the buyer who is able to demonstrate wherewithal to the seller. An expert capital markets partner is a critical component of a distressed-buyer's arsenal.
There is no definitive answer to the question of whether it is a time to buy distressed assets in the Detroit area. Values continue to fall precipitously, and the surrounding market dynamics have yet to be fully understood. However, the real answer in Detroit, as in every other market, is that the investor with the most complete information will be best positioned to reap the rewards of a buyer's market.
Nicholas Coburn is a founding partner of Birmingham, Mich.-based GreenAcre Partners. The firm specializes in the asset management, advisory services and principal investing involved with distressed residential and mixed-use assets. GreenAcre Partners also has offices in Chicago; Los Angeles; Atlanta; Phoenix; Charleston, SC; and Austin, TX. More Articles
