Front page news in today's paper indicates that the commercial real estate market in Richmond, Virginia is slowly deteriorating, with more properties in danger of default on existing debt. According to Real Capital Analytics, a New York commercial real estate research firm, there are 25 distressed properties here in the Greater Richmond Metro area, with a total debt balance of $371M.
Trepp, another New York firm that evaluates and tracks commerical mortgage information, has 66 Richmond properties on a watch list, including two big shopping centers owned by Taubman Centers Inc., Stony Point Fashion Park and Regency Square Mall. These properties are considered distressed because of increased debt-to-income ratios caused by decreasing rents. Less income = higher debt-to-income ratio = possible violation of debt service coverage ratios and covenants in commercial mortgages.
The Taubman Center mall properties are great examples of the difference between distressed properties vs. distressed sellers. These properties are not distressed, in the way we tyically think of distressed properties. They have good tenants, the owner is spending money on tenant upfit, new tenants are signing leases. Distressed sellers own performing assets, but have gotten themselves into trouble by over-leveraging, or can't access capital, or are just victims of the market downturn and decreased rents and property values.
Silver lining in this news: For commercial investors with access to capital, you should be able to pick up some great deals for well-below actual values. But everyone realize, it's going to get worse before it gets better. How much worse is the question no one is able to answer.
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