Western Title put it all out there at the Commercial Round Table on April 21st, held at the Builders Association of Northern Nevada Seminar Hall: If you build it, will they come? In northern Nevada, that's definitely not the case at the present time!
How are banks able to report such massive profits during this “great recession”? John Dwyer: When things began to slide downhill, the Feds stepped in and provided instant cash to the banks. These bailout loans accomplished two things: they gave the banks the ability to loan, and they bought the loans from the FDIC at 0% interest. They then had a choice…lend it at 5-6% interest, or they could take the money and give it back to the FDIC at 3% with no risk. These deals brought cash into the market, and instead of completely crashing, we entered a sort of “stepped down” process. Additionally, with somewhere between 1.2 and 1.9 million homeowners underwater with their homes, a number of them have chosen not to make their mortgage payments. This “Extend and Pretend” scenario has allowed some homeowners to get healthier—cash-wise—and has allowed them to avoid foreclosure, save money, and avert disaster…for the present time. This money saved is in the banks, propping up the bottom line.
Where is the commercial market in Northern Nevada heading? Are we beginning to see commercial foreclosures coming online? Ken Stark: March 2010 shows that 31 commercial properties sold—but 43% of those sales were on the courthouse steps, with a majority of them being purchased with cash. No lending took place. It’s still early, but I expect to see more commercial foreclosures coming. Clint Steele: When Reno was a major construction market for builders, headquarters buildings comprised 40-50% of the commercial market. With today’s downturn, those builders and developers have turned in their keys and have opted to lease, not purchase, keeping their capital intact for future growth. I expect more declines. Mark Krueger: With regard to land, we saw the downturn begin in 2006, with land decreasing 80-90% and housing tumbling 50%. While most of the damage has been done, I believe we’re just entering the correction period for commercial property.
Do banks have money to lend today? Susan Klein: Wells Fargo has money—lots of money—available. However, borrowers must have strong guarantor support, strong tenants, and strong leases. All of this can certainly be a challenge in today’s economy. It’s not the market of yesterday. Ken Stark: We’re seeing investors playing a bigger and bigger role today. They’re looking more at the stock market rather than real estate for their investment dollars—real estate is still to “iffy” and they’ve become far more cautious. Unfortunately, these same investors are looking at Tier 1 and Tier 2 cities for their investments, not Reno. We’ve always been dependent on Northern California. When it heals, Reno will begin healing. Dominic Brunetti: I agree with Ken. Other markets, such as the Bay Area, are far more attractive to investors with their investment dollars because they perceive less risk and a better return.
What’s going on with appraisals these days? Mark Krueger: Appraisers have been crucial to the lending, title and mortgage business. In 2007 through mid-2009, they literally tanked the mortgage business because they were so slow about dropping values in accordance to actual sales. In Spring ’09, it dawned on them what was happening, and they began to appraise at actual values. We’re now starting to see deals come in. Ron Cobb: Another challenge is the assessed values in the smaller counties; they’re in a real “Catch 22”—the values are assessed too high, but the counties can’t afford to reduce them because they need the tax revenue. I have a property in Nye County that is assessed at $1.3 million with a real market value of just $100,000. Also, there is some work being done to generate appraisal policies that would create a standard for appraisers. Recovery: when? Tom DeJong: For our industrial market to recover, we need jobs. I’ve been showing a number of manufacturing companies industrial properties, as they’re seeking to escape from California and now Oregon, with its new tax laws. Jobs create stability and consumer confidence—we need both. Ron Cobb: I believe commercial still has a ways to go. We’re getting more inquiries, more requests for bids; however, some of those deals are to hold the land for 3-5 years. And once again, the investor dollars are headed to the more metro areas, not northern Nevada. Dominic Brunetti: One of my major concerns right now is our almost unbelievable commercial vacancy rate of 27%. It’s going to take time to absorb that vacancy. Ken Stark: No doubt. We need a healthy California. For instance, programmer jobs will most certainly remain in the Silicon Valley. But as those businesses become healthy, they’ll relocate their back offices here because it’s far less expensive to operate in Nevada. Those are $70K jobs—we need them in northern Nevada. The leases we’re working on today are short term—1 to 2 years. Landlords are just trying to get through these tough times. We all are.
Commercial Roundtable
Experts
Mark Krueger, Grubb & Ellis
Ron Cobb, Commercial Partners
of NV
Tom DeJong, Lee & Associates
Clint Steele, Lee & Associates
Dominic Brunetti, NAI Alliance
Ken Stark, Stark & Associates
John Dwyer, Western Title Co
