A Few Thoughts on Today's Auction

Last year, Auction.com held an auction that included quite a few commercial pieces located in Las Vegas. The general feeling was that the auction was a success - many properties moved, prices were set, and in the months after property sales increased dramatically in Las Vegas. By the fourth quarter of 2011, though, sales were flagging, and they were downright pathetic in the first quarter of 2012.

For this reason, a few people were hopeful about today's online property auction. They needn't have been.

Today's auction was significantly smaller than last year's auction, and the properties far less stellar. By the time I gave up on watching it, only one property had sold (i.e. auction closed and reserve met). Most of the other 9 finished without the reserve being met, and at final bids a bit higher than one would have expected. The inside dope is that most of those bids came from sellers either trying to juice up interest in their properties (alas - they weren't very convincing shills) or maybe set new "market prices" on their properties. One of the "final eight", Stephanie Paseo Verde, seemed to be a genuine item, and most agreed it was the pick of the litter.

Where does this leave us?

Well, clearly today's auction is not going to spark off a new round of buying in Las Vegas. Oh, sales may improve, but it won't be because of the auction. Another auction is being held in a few weeks, and perhaps that one will fare better. In the meantime, we keep slogging through the Great Recession, waiting for bluer skies.

The Looming Shadow of CMBS

Kevin D. Williamson of the National Review just wrote a piece on the looming CMBS bonanza/Armageddon awaiting us all in 2012. As he points out:

"In New York City alone, there’s about $70 billion worth of commercial mortgages — some of which have been sold off as mortgage-backed securities, naturally — coming due this year. The national total is more than $150 billion, or a bit more than 1 percent of U.S. GDP."

You can read the entire article HERE.

Southern Nevada is, of course, no stranger to the world of distressed commercial real estate. In fact, we're probably in close competition with Sacramento for the honor of being the poster child of distressed commercial real estate. I've been tracking the area's distressed CRE since Q3 of 2009, when we had 4.1 million square feet of distressed space, most of it retail. In Q1 of 2012, we've jumped to 15.4 million square feet of distressed space, most of it now in the industrial sector.

The growth was, of course, astounding early in the recession, but has since calmed down to a trickle.

What we're now waiting to see is ... how will things shake out in 2012. Sales of distressed space had a big boost in the second quarter of 2011, notably after Auction.com's auction of around twenty CRE properties. Auction.com has another auction set for a couple weeks from now, and that might produce the same jolt to the system.

We had better hope that it does. After just one month of Q1, 2012, distressed space has grown by 4.9 percent. If we continue at that rate, we will see the gradual slide in distressed growth make an unwelcome U-turn. If distressed space keeps mounting at the same rate, Y-O-Y growth for the first quarter of 2012 will be in the neighborhood of 16 percent, the worst number we've seen since the first quarter of 2011, and the first increase

How will this potential flood of CMBS affect the local commercial market? It will drive the value of real estate down even further than it already has, which has the perverse side effect of pushing properties that otherwise would be in decent shape underwater in terms of their loan-to-value ratio, thus perpetuating the cycle. As these properties are snapped up by canny investors, they'll be able to undercut their competitors on rent, which to date is proving the key factor in many of the leases being signed these days.

In a nutshell, the cycle of re-valuing commercial real estate is not over by a long shot. You have to forgive property owners for thinking that the 50 percent plus haircut they've taken on the value of their properties has to represent the end of the cycle, but the looming wave of foreclosures and short sales suggests that it is not. Commercial real estate in Southern Nevada is already selling at below replacement cost, and it looks like those values, and prices, are going to be compressed a bit further before all is said and done. The lesson here - there are deals to be had in Southern Nevada, but only if you want to hold them for the long term. While quick flips are not impossible, especially for properties bought at an absolute premium at an auction, they will probably be the exception rather than the rule for the next few years.

Where is the Distressed Space in Vegas?

Sometimes, when you look into a thing you discover a pattern that you suspected would be there, or you discover a pattern that takes you by surprise and sends your thinking in a new direction. Sometimes, however, you find no pattern at all, which in itself can be informative.

Recently, I placed all of the distressed commercial properties we track in our database onto a map of Southern Nevada to see if there was a pattern I should be aware of. The answer was that there was no pattern at all. Distressed commercial real estate assets are not concentrated in any particular area of town, but rather follow the overall pattern of commercial real estate development.

This suggests that while over-building (i.e. too much supply, always a tricky thing to predict) may not have helped the commercial real estate market in Southern Nevada, it certainly was not at the root of our problems. Demand for product is hampered by the Great Contraction – our unsustainable debt to ourselves – and this contraction has struck everywhere without prejudice.

As the current distressed problem slowly works itself out, we may see the shrinking islands of distressed properties centered on older areas of town, but for now, properties both old and new are suffering.