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The three-story complex, built in 2006, sits next to Interstatr 80 near Del Paso Heights in the GlenwoodMeadowsz neighborhood, a mix of new homes and overgrown empty self-storage facilities and ramshackle duplexes. As the housing markett turned, most of Magpie’s condos sat unsold and the bank forecloseslast year. Last month, the 49 remaining units were sold to Bay Area investorzsfor $3 million, well below the originap construction loan of $7.4 million, accordin g to county documents. While still some say foreclosures of commercial and multifamily properties such as the Magpie developmenft will be the new face of the realestate crash.
“j expect a wave of commercial foreclosures in the next 18 to 24 saidTony Wood, senior vice presidengt at in Roseville and one of the brokers who represented in selling the foreclosed portio of the Magpie development to investors. “Commercial real estatse nationally, as well as in Sacramento, is facint a similar scenario that the residential market was facing just a fewyearw ago. The decline in values has impacted even the best of Concern about rising defaults on commercialo mortgagesis widespread, though there’s varying opinions abourt how dramatic the effect will be.
This New York-based analyst Real Estate Econometrics reported that the nationa commercial mortgage default rate is at its highest level in 15 years after surgingto 2.25 percent durinvg the first quarter of the That was up from 1.62 percengt in the previous quarter. The defaulr rate for multifamily mortgages was even risingfrom 1.77 percent to 2.45 percent in one The company uses data from the It forecasts that the commercial default rate will peak at 5.3 percent at the end of and will fall only gradually thereafter.
“Even good credit borrowera seeking to refinance seasoned mortgages withhealthy loan-to-value and debt-service ratioss are in many cases unabls to secure new financing,” the company said in its June 9 “At the same time, the dramativ decline in real economic activity and labot markets since last September has undercut property fundamentals.” But therde isn’t a consensus on how broadlyu that effect will be felt. “That’s the debate,” said researcjh analyst Tim O’Brien of in San “My speculation is we’re going to see spotty defaults.
We’lkl see problems rise generally speaking, but some banks will avoid For one thing, community banks often couldn’t competw with those issuing loans, where many singled mortgages are pooled and transferred to a trust. So, many of thos e banks might have less exposure to he said. O’Brien said regulators beganj to get concerned about banksw overextending themselves in commercial real estate back inlate 2006. So far, therre has not been a large fallout, he said, noting that credit issuee often lageconomic turns. Abundant supply, lower rents Why are commerciadefaults rising? Much of the blam falls on increasing vacancies and declining rents.
“Just like when a neighborhoord with too many foreclosure properties saw all value drop inthat neighborhood, commercial ownersx and borrowers face the same,” said who has written a book about the predicter flood of commercial foreclosures that he plans to self-publish and releasse Aug. 1. Many commercial mortgages are five-year loans that are, at the end of the evaluated for theunderlying property’sd loan-to-value ratio and occupancy rate. Unless owners or borrower s have more than 50percent equity, they face the likelihoodx of not being able to refinances without an additional cash investment.
Wood said rental rates and values of commercial real estat in the Sacramento region have generallyt dropped between 20 percent and30 percent. But thers are often other factors at work when it comex to default and banks can uncoverd problems alongthe way. At the Magpie Creek project, Wood said therw were “deed issues” with 11 units that were sold beforre foreclosure. He said the deeds did not include the development’s common areas, leaving them and that the condo association was not fully
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