In nearly every market, lenders were first hit with the collapse their loans backed by vacant land and vacant single-family lots. In any market, it is awfully difficult for a borrower to persuade a lender that a piece of vacant, no-income producing land can be made to perform when the market for vacant land and lots has all but vanished. So the vacant land and lots were the first products taken back by the lenders and made available at distressed pricing. These products have dominated the distressed market in terms of sheer volume of offerings for the past 9 months.
Over the last few weeks, we have started to see signs of the next stage: vacant buildings being sold by lenders, and under-performing, occupied property being sold by owners at or slightly above their respective loans. The problem is that many of the vacant buildings are vacant for a reason. In some cases they shouldn't have been built in the first place, or they are inherently an inferior product compared to the immediate submarket. In other cases there truly is an unexpected reason for why a building has become vacant. Baceline is searching for these unique situations.
The other trend we are seeing is owners offering their properties for sale right at or slightly above their loan amounts, recognizing that they will lose the bulk of their equity and wanting only a clean exit. The problem is that much of this product is not worth the amount of the loan in its current, low-occupied, under-maintained state and will require additional equity, which the current owner does not have in hand and cannot access through increased loans. So, while buying commercial real estate at a discount to the equity in the property sounds good, the price usually doesn't correlate to the type of returns needed to attract those who do have the necessary capital to take on the risk associated with turning a distressed property around.
I believe the next stage to come will be the delivery by lenders of foreclosed, underwater assets, offered at a discount to their initial loan amount. I also think that until this 'good stuff' comes out, the vacant land, vacant lots and vacant buildings will not trade because, while there is a significant amount of 'distressed' equity waiting for opportunity, that money will not be unleashed until there are better 'distressed' opportunities in the market.
With that said, there are select distressed opportunities in the market that make sense depending on an investor's investment parameters. Baceline is well-positioned to see its fair share of the distressed product. First off, we are an all-cash buyer, so we are uniquely able to get the attention of the finance and brokerage community involved in selling distressed product. Also, while many of our competitors are doing everything they can to keep their own properties afloat and rework their lender arrangements, we have been out in the market widening and deepening our network. We now have a database of over 1,800 lenders, brokers and other real estate professionals in our select target markets with whom we stay connected through continuing personal visits, phone calls, and web-based marketing. To each of them, we drive home our basic story: we are an all-cash buyer, familiar with their market, able to close quickly and looking for distressed real estate in their particular market. One thing is clear from the past 9 months of searching, we are ahead of the curve and in prime position for any distressed opportunity meeting our acquisition parameters.
