Stresses exposed in commercial sector

Use our Interactive Map to find the loan status of ocommercial real estate under stress.
Use our Interactive Map to find the loan status of ocommercial real estate under stress.

Uptown's sleek, high-end Westin has suffered in the downturn, with more than 40 percent of rooms empty last year and profits tumbling.

The hotel fell at least $1 million short of the money needed for payments on its $185 million loan.

The Westin, which has remained current on payments, is one of a growing number of Charlotte-area commercial properties on a roster of stressed loans, according to an Observer analysis of Bloomberg data.

Most of the red-flagged, or "watchlist," properties are not behind on payments. However, they have seen rents fall, leases expire, occupancy drop, bankruptcy of a parent company or some other financial stress that raises concerns about the ability to continue paying. Some, like the Westin, are tapping other sources to make loan payments.

Other properties have seen more deterioration. Some are months behind on payments. A small but growing number are tottering near foreclosure, have been foreclosed on or face other action for nonpayment.

So far, Charlotte-area commercial property stress levels are lower than those of the Southern region and the nation. However, Charlotte's housing woes also lagged the national downturn. Experts say the same is likely with commercial property, signaling it could see further decline.

Several recent high-profile problems underscore the growing vulnerability.

Ballantyne Village, in a high-profile, southern Charlotte development success, could face a foreclosure auction. Uptown entertainment hot spot, the EpiCentre, sought bankruptcy protection last month to avoid foreclosure. In March, IBM's former 12-building home in University City sold at a fire-sale price after a previous owner defaulted on a $120 million loan.

To gauge the potential commercial real estate fallout in the Charlotte area, the Observer analyzed more than 1,000 commercial mortgages that were packaged and resold to investors. Packaged loans - accounting for about 20 percent of the nation's $3.3 trillion in commercial loans - are typically for income-producing properties such as hotels, apartments, shopping centers and offices.

These loans require more financial disclosure than others. That disclosure offers rare insight to the broader commercial real estate market's struggles. Hotels, for example, have been particularly hard hit in the downturn, regardless of whether they are financed directly by a lender or through a packaged loan.

Nonpackaged loans also include riskier forms of commercial lending, such as land development and condo and other new construction. Those are all deals in which the loan's repayment depends on future sales rather than the existing income stream typical in a packaged loan.

If packaged loans are having problems, "you can bet other real estate is having problems," said Tom Fink, a managing director with Trepp, a New York commercial real estate data and analytics firm.

Key Observer findings:

The percentage of Charlotte-area packaged loans that have been unpaid for two months or longer more than tripled as of June 30, to almost 6 percent, compared with a year earlier, according to Trepp, which also provided analysis.

More than one-third of the area's roughly $5 billion in packaged loans faces some form of stress. Some properties are barely managing to pay their debt.

Property values for the group of stressed loans have fallen an estimated 23 percent - or $633 million - based on a calculation that takes into account property income.

Actual losses on a small group of newly appraised, troubled properties averaged 53 percent.

Looming loan maturity dates mean more owners could face trouble refinancing because property values have deteriorated. Several owners already are warning they can't pay and haven't been able to get refinancing.

In Mecklenburg County, commercial real estate accounts for about one-third of the property tax base, about $26.5 billion. Rising delinquencies, sliding income and falling values put at risk that part of the tax base, potentially forcing homeowners to pick up more of the tax burden.

The overall economy also suffers. Empty shops, offices and hotels mean new construction - and the jobs it creates - is on hold. Vacancies also drive down rents for competitors and depress property values, just as the glut of foreclosed homes depresses the housing market and slows construction.

Failing commercial real estate loans are hurting bank balance sheets and have toppled some lenders. The losses on stressed loans drain money from the recovery.

"It's gone with the wind," said N.C. banking commissioner Joseph Smith, who sees commercial real estate woes as one of the greatest strains on banks.

At nearly 6 percent, the Charlotte area's delinquency rate for packaged loans is below the national average of 8.6 percent, as of June 30, according to Trepp. Charlotte's rate is also below the 8.3 percent for the six-state region, which includes South Carolina and Georgia.

Raleigh-area delinquencies jumped in the last year, from 0 to more than 5 percent. Atlanta saw packaged loan delinquencies hit 10.6 percent in June.

Nationally, the rate of increase in delinquencies slowed in June and again in July, "giving the market hope that perhaps the darkest days...were over," Trepp wrote in a report last week.

The issue for commercial real estate - as with residential - is high unemployment.

The Charlotte area will see more delinquent loans and troubled properties because the recession hit Charlotte later than other cities, said real estate economist Peter Compton with CoStar Group, which collects and analyzes commercial real estate data.

"But the sky's definitely not falling," he said. "It's not a terrible fiasco that's going to set Charlotte back 10 or 20 years. Charlotte's still good for business and attractive to companies."

He added: "But it will be next year before rents turn around and values start to grow again.... And appreciation in the future will be slower."

Westin outlook

In 2008, Mecklenburg County tax officials were banking on strong appreciation in commercial property values to offset potential declines from the housing crisis.

But the nation was already in recession. The cancer of lax lending was eating away the value of homes and investments. Commercial construction held on longer than residential, in part because the projects take longer.

As the nation's financial system imploded, jobs disappeared in Banktown. Jobless consumers and those worried about losing jobs stopped spending on everything from shoes to sushi to weekend getaways. In turn, businesses scaled back or closed, further depleting income generated by commercial properties.

In 2008, soon after taking its $185 million loan, the Westin was earning nearly three times what it needed to make its loan payments. Last year, those monthly payments rose to about $1.2 million. At the same time, earnings fell. The Westin generated about 90 cents for every dollar due, according to Observer analysis of Bloomberg data and original deal documents.

That means the building wasn't supporting itself, so the owners had to pay the shortfall out of pocket.

"The Charlotte market has seen a drastic decline in business travel due to this being a major banking driven economy," the servicer for the Westin loan wrote in notes last updated in May. "The competition to fill rooms has therefore been impacted by this decline."

However, the servicer added: "Borrower does not foresee an issue with making future debt service payments at this time. Borrower has been funding shortfalls on a monthly basis."

Nationwide, hotels have suffered in the downturn. Hotel loans have the highest delinquency rate of all packaged loans, at more than 18 percent as of July 31, according to Trepp.

In another remnant of boom times, the Westin's appraised value at the time of the 2007 loan was $250 million. In 2004, on an earlier loan, the hotel was valued at $120 million.

"The mortgage loan for the property is healthy - it's always been a performing loan and will continue to be a performing loan," said Richard Jones, chief operating officer for owner Portman Holdings.

He added that "hotel demand in Charlotte and at the Westin has been growing exceptionally well this year.... We are encouraged by these trends and look forward to continued improvement and long-term success for the city of Charlotte."

Depressed values

The recession has depressed values on all types of properties across the region, although there's no way to say for sure how values have declined.

By one measure, an Observer analysis found the group of stressed properties may have shed an estimated $633 million, or 23 percent, of their value. The analysis used a valuation measure from the original loan and the most recent operating income, as reported by Bloomberg.

Experts estimate Charlotte-area commercial properties have shed an average of 35 percent to 45 percent of their value.

Appraisals are one way of pegging a new value.

Eastland Mall was valued at nearly $71 million for a 1998 packaged loan. Last December, a new appraisal set the value at just $4.2 million, a loss of 94 percent.

That was the biggest hit among the 17 Charlotte-area properties that were part of packaged loans and underwent new appraisals since the start of last year, the Observer found. Losses on the 17 properties totaled $181 million.

New appraisals are typically requested by loan servicers on seriously troubled properties, and the last year or so has seen a jump in those revaluations. Ballantyne Village, whose owner is negotiating to avoid foreclosure, shed more than $40 million of its 2006 value, based on a December appraisal. That was the second largest drop identified.

Concord Commons shopping center also took a hefty hit. Late in 2005, the center appraised for $39 million. Less than four years later, the shopping center was reappraised at $15.1 million - a drop of more than 61 percent.

During that time, the nearby massive Philip Morris cigarette plant closed. The center lost a major tenant when national clothing retailer Goody's Family Clothing filed for bankruptcy protection. The downturn also claimed smaller tenants, including a Chinese restaurant and a nail salon. Loan payments are more than a year past due, according to Bloomberg data.

"Several tenants have asked for rent reductions," the loan servicer wrote. The servicer added: "Borrower has indicated no willingness/ability to invest additional cash...."

Owner Daniel Halberstein of Concord Commons LLC in Aventura, Fla., said his firm has asked for a loan modification. He declined further comment.

In a down market, distressed sales also set new values for properties. The Observer identified eight properties that experienced a loss through liquidation, foreclosure or similar action in the last year. Losses totaled nearly $17 million.

Many unable to get new loan

Commercial real estate loans are often set up with a big payment, called a balloon, due at maturity. During the boom, interest-only loans also became popular, leaving the full balance due at maturity. At that point, property owners usually counted on getting a new loan.

Problem is, banks won't refinance for more than a property is worth. Income is a key driver for setting commercial real estate values, and when it falls, properties can be worth less.

These days, even property owners who have made payments on time may be unable to get a new loan. Those who have struggled with lower occupancy, reduced rents or increased expenses face an even tougher challenge. Some owners have worked out modifications, such as a year's extension, hoping for better times.

For months, the owners of 20 Charlotte office buildings warned they couldn't make the $160 million loan payment due at maturity, which passed on Thursday without payment.

The Oakhill office campus, with its landmark fountain along Interstate 77, includes several buildings that are part of the 33-property loan. The 20 Charlotte sites stretch from northeast to southwest Mecklenburg. The deal also includes 13 Tampa, Fla. properties.

The properties were appraised at $203 million when the interest-only loan was taken in 2005. No new appraisal value was posted on Bloomberg as of Friday.

However, bankruptcies among tenants, vacancies and demands for lower rent have pushed income down for the package of properties. The owners stayed current with their monthly interest payments, but haven't been able to refinance for the $160 million due.

"We are in good dialogue with the lender to renew, and we are confident we'll arrive at a satisfactory solution," said Melissa Gough, marketing manager for Eola Capital, which invests in and manages East Coast real estate

More than $1 billion of Charlotte-area packaged loans come due by the end of 2012, nearly half of that in the next 17 months.

"2012 is likely to be the first good year for the economy in a long time," said Mark Vitner, a Wells Fargo senior economist in Charlotte. However, he said: "The next six months are likely to be very challenging. The economy may slide back a bit."

And so commercial real estate's stresses will likely mean property owners continue wrangling with their lenders, more foreclosures and distressed sales and more pressure on banks.

Already, nearly half of North Carolina's 86 state-chartered banks are on N.C. regulators' list of troubled institutions. Soured commercial loans, such as development and home-construction deals, are one of the biggest problems.

Locally and nationally, experts say there are deep-pocketed investors eagerly awaiting the bargains to come. That discounting and existing vacancies mean construction cranes, once jokingly called Charlotte's official bird, are not likely to flock to the skyline for a while.

"We knew back in 2008, it couldn't be that good forever," said Jason Kenna, service manager for Heede Southeast, a third-generation family crane company in Pineville. Now, he says, "I don't think we'll see high-rise residential, condos and offices all at once again, for at least 10 years."

Staff writer Kirsten Valle and researcher Maria David contributed.

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