National Real Estate Ventures Commercial REO

NREV’s latest analysis of the commercial property sector indicates that asset values will continue to fall as net operating income (NOI) shrinks, as rent from tenants decreases and bankruptcies and cap rates increase. The value of all commercial real estate in the United States has dropped from $6.7 trillion in 2008 to $4.7 trillion in 2010.  Commercial debt during this time has only fallen by $200 million—from 3.5 trillion to $ 3.3 trillion. This translates to a fall in commercial equity from 3.2 trillion to $1.4 trillion—a drop of nearly 60%.  It is estimated that over $1 trillion of new equity will have to come from somewhere to permit the refinancing of all commercial loans coming due in the next 4 years. There is an acute absence of reporting in the media about this coming commercial catastrophe.  The consequences of this commercial property are just now beginning to come to light.  It is expected that the number of resulting bank failures will exceed those that occurred during the Savings and Loan crisis in the late 80’s and early 90’s.  This is because the percentage of real estate loans as a percentage of all bank loans has increased by 20 percent since 1992—representing 72% of all small community bank loans.

Although banks and CMBS servicers have been avoiding foreclosures and discounted sales by extending loans, NREV believes that commercial REO and mortgages will flood into an illiquid financing market during the next several years. The situation is as grave in the commercial mortgage-backed security market where referrals of troubled assets to special servicers, particularly apartment and retail mortgages, is increasing exponentially. The great difficulty of modifying mortgages within the CMBS structure will further increase commercial foreclosures.

NREV’s principals have a great depth of experience in all aspects of the commercial real estate industry, including over $1 billion in acquisitions, $750 million in dispositions, development of over one million square feet of commercial real estate and service as CEO of one of the industry’s premier fashion retailers. This background has enabled NREV to pay particular attention to the potential acquisition of commercial property when the time is finally right.

NREV has recently completed a comprehensive survey of commercial properties with distressed mortgages in banks and conduits maturing prior to December 31, 2012. This analysis has yielded unique and proprietary information on NOI, rent levels, mortgage status, and identification of special servicers and commercial bank workout teams, with whom NREV has established relationships.

This research has led NREV to conclude that when the retail property industry has completed the current downward cycle, NREV will focus its attention on grocery anchored community centers in southeastern states, targeting very specific areas that enjoy relatively stable employment and economic growth.

NREV does believe that one income producing real estate sector will lead the way—multifamily (apartment) properties.  The resurgence of this sector will be a consequence of the millions of homeowners that will be forced to rent as a result of foreclosure—unless the federal government steps in and commits trillions of dollars to effect millions of mortgage reductions—including actual reduction of mortgage balances.

In anticipation of this multifamily boom, NREV has already begun due diligence on a number of multifamily projects in several cities, and is expecting to set up investment funds shortly.

On a wider scale, as distressed commercial property becomes available at substantially reduced prices, NREV will be well-positioned to acquire all product lines of commercial REO and mortgages, from hotels to industrial and office buildings, at a discount to replacement value and then manage the properties, ultimately selling on the assets in a rising market as the economy rebounds.

NREV’s principals have seasoned relationships with financial institutions, brokers and government agencies which will provide NREV access to commercial distressed assets at lower prices than competitors. In addition, NREV principals have strong contacts with key third party contractors which allow NREV to participate in the acquisition, management and disposition of commercial properties on a multi-billion dollar level.