How to Double Down on Coming Trouble

Banks may still have a lot of bad commercial loans on their books, but smart real estate professionals shouldn't be shy about capitalizing on them.

November 10, 2012

One in eight banks is in real danger. There's a wave of foreclosures coming to the commercial sector. Oh, and that recovery everyone keeps talking about? It's probably going to take a decade.

These are among the troubling pieces of news Gary Ralston, CCIM, CPM, CRE, Coldwell Banker Commercial Saunders Ralston Dantzler Realty in Lakeland, Fla., impressed upon attendees at the 2012 REALTORS® Conference & Expo in Orlando. But his main message was not one of doom and gloom. He was there to explain to commercial real estate practitioners how to take advantage of coming market swings.

Ralston said that the reason for the potential wave of foreclosures is that banks are restructuring commercial loans without attacking the problem of overvalued properties, a practice he called "extend and pretend."

"A great deal of this problem has been pushed down the table," he said. "Just hoping it's going to get better isn't going to fix anything."

Ralston said that a sizable chunk of these "pretend and extend" mortgages will be maturing between 2015 and 2017, at which point real estate agents can be in a good position to get involved.

Ralston explained that real estate professionals who are in a position to be "able to organize capital and be able to buy the loan from the bank" have two options in acquiring foreclosed commercial buildings. In cases where the building management or owner is the one losing the money, they can foreclose on the property and own/operate the building themselves. Or, as a financial entity that is not under the same regulations as an insured depository institution, Ralston said the restructuring can be done in a more sustainable, profitable way than the bank could accomplish.

Acquiring foreclosed properties also comes with physical risks. With no one to manage it, a foreclosed building can easily fall into disrepair, and the longer it remains so, the worse the problems get.

"We don't count foreclosure in days or months, we count it in years," Ralston said. "It's a little bit like [if you were to] take a long vacation and leave the kids in charge."

But that risk can also factor into your reward. Ralston said banks don't want to manage property, so if you step in and offer to buy, you're unlikely to run into much resistance.

Ralston advised real estate professionals looking into taking advantage of this "lurking situation that is bubbling under the surface" to focus specifically in retail. With cash register-derived analytics, it's easier to tell what kinds of revenue tenants will have and what kind of rent to charge them. He noted that retail is recovering more quickly than other commercial markets and that the overall economic recovery will be built by small businesses who fit well into retail locations, even if they aren't classified as retail in the traditional sense.

While Ralston says that "over the next few years there's going to be a once-in-a-lifetime opportunity to acquire well-located commercial real estate properties," he doesn't think real estate professionals need to rush into the market.

"I also don't think you need to be in a big hurry. It’s not like they're going to run out tomorrow," he said. "It's going to be a granular business... a one-on-one battle with short swords."

Meg White

Meg White is the former managing editor of REALTOR® Magazine.