I don't have a crystal ball. My friends, family and colleagues often ask what my thoughts are about the economy and the real estate prices. All I have is anecdotal evidence that suggests that we have just seen the beginning of the commercial slump, and I've been saying that since mid-2009.
Sometimes it's bad to be right. In my practice as a real estate attorney, we saw in early 2009 that commercial tenants were struggling to pay rents to landlords. We saw some lease revisions reducing rent. As the bankruptcy filings sky rocketed, we saw more commercial property loans defaulting and as creditor's attorneys, we were asking for relief from the automatic stay to go to foreclosure sale on those commercial properties. The commercial loan defaults did not seem to be driven by the subprime mortgage meltdown, but the recession itself putting pressure on small business owners and borrowers.
Which brings me to the recent foreclosure sales of major commercial properties in Redwood City, Sunnyvale, San Jose and San Francisco. Recently I read an article by Sharon Simonson (who used to write for the Silicon Valley Business Journal but now is with SF Registry. On Feb. 2, 2010, she reported the following:
"Bank of America is widely expected to become owner of nearly 43 acres in North San Jose following a trustee sale scheduled for Feb. 3 on the Santa Clara County courthouse grounds. Borrower Tishman Speyer Properties used the land as collateral for an $86.2 million loan in March 2007. Tishman, which paid more than $60 a square foot for the site, or $114 million, has defaulted."
As I recall, Tishman bought that "prime" piece of San Jose property because it was smack dab in the heart of many Silicon Valley players such as BEA and Philips. The plan was to develop almost 3M sq. ft. in office space. Guess they scrapped those plans!
The article goes on to talk about other big recent foreclosures on commercial real estate:
"Meanwhile, the so-called Town & Country site in downtown Sunnyvale has gone back to its lender. The borrowers, San Mateo’s Peter Pau and San Francisco’s RREEF Funds LLC, owed more than $21 million for the tight block of 11 parcels adjacent to the failed Sunnyvale Town Center redevelopment, in which the two were also partners. The bank set a bidding floor of $15.9 million for the 4.61-acre site at a trustee sale Jan. 29. That’s a 25 percent discount to the loan’s face value. No one stepped forward with a check. The block is slated for 450 units of housing at nearly 80 units an acre, according to a city-sanctioned specific plan."
Looks like banks like East West bank and Pacific National are going to have a glut of inventory on commercial property. Too much supply generally means, prices go down.