business

Foreclosures of office buildings, stores and other commercial properties in Hennepin County continue to climb, a sign that the weak economy and credit squeeze are making it difficult for the owners to pay off debt.

Commercial-industrial foreclosures rose 14 percent last year to 58, according to figures from the county's taxpayer services department. The increase since 2007 is 81 percent.

Though they are a small share of foreclosures in the county, these business properties can be everything from stores to large industrial buildings, and the economic effect of one commercial foreclosure can far outweigh that of a single home.

The increase came as home foreclosures eased, with 3,434 in 2009 compared with 4,181 in 2008. Apartment building foreclosures in Hennepin County also fell by about 30 percent last year, to 61 properties.

In addition, the mix of commercial properties falling into foreclosure appears to be changing, according to Jeffrey Larson, whose Eagan-based JBL Cos. works with distressed property owners. "They're falling further away from the housing sector," he said.

The early wave of commercial foreclosures was mostly tied to troubles in the residential market, which hurt retail properties near failing housing developments.

Now, commercial foreclosures reflect broader troubles in the economy. Last year's list included industrial properties in Minneapolis and suburbs, a shuttered Circuit City store in Minnetonka and a building at 1901 Nicollet Av. S. that houses the offices of its owner, property manager JAS Apartments Inc.

Spreading into 2010

Two notable foreclosures so far this year show their spread into all segments of the commercial market. A large portion of Edina's Pentagon Park -- the first office park built in the Twin Cities -- was sold back to the lender at a sheriff's sale last month for almost $20 million. And just a few weeks ago, Brookdale Center in Brooklyn Center -- one of the area's first enclosed shopping malls -- was sold at a foreclosure auction to a representative of the lenders for $12.5 million.

Larson said he doesn't expect any immediate recovery from the wave of commercial foreclosures. "We're still at the beginning of the cycle, which should go for another two years," he said. One major reason is that many properties were bought at the top of the market with short-term debt that has matured. The tight credit market continues to make it hard for owners to refinance or sell properties to get out from under debt loads, he said.

Hennepin County's largest commercial foreclosure last year was the Northland Inn in Brooklyn Park. A business entity controlled by the lender, Column Financial, acquired the 231-room hotel and conference center for about $21.1 million at a sheriff's sale in December.

Christopher Hayhoe, a Minneapolis attorney who represented former owner Parkland Hotel Investors, said the hotel had begun to rebuild business from the post-9/11 downturn in travel but suffered a more serious setback when the recession hit. Parkland tried to sell the property but found potential buyers either were unable to arrange financing or were scared off by the generally depressed travel market, Hayhoe said.

The county's figures only include sheriff's sales of foreclosed properties and may actually understate the extent of the distress in the commercial real estate market. That's because borrowers in default sometimes agree to hand back properties to lenders to satisfy loans and avoid a foreclosure sale. The Northland Corporate Center -- another Brooklyn Park property owned by Parkland's president, James Stuebner -- was taken back by lenders without a foreclosure and later sold in a sealed-bid sale similar to an auction.

Opportunities emerge

The rise in commercial foreclosures has created buying opportunities for some investors and developers. Last fall Minneapolis-based Hillcrest Development paid $1.3 million for a two-building office complex at E. 35th Street and Hiawatha Avenue. It had been put up for sale by the lender, St. Paul-based Bremer Bank, which had taken it back in a foreclosure auction last summer.

The previous owner had paid about $2.7 million for the properties in a series of transactions from 2000 to 2004 and had planned to build a new mixed-use project on the site. Those plans fizzled when the development and financing markets went into a tailspin, said Scott Tankenoff, a managing partner of Hillcrest.

"We felt it had potential because it's in such a good commercial corridor," Tankenoff said. Hillcrest has made some modest improvements, like landscaping, blacktopping parking areas and remodeling some interiors of the property and has renamed the Hiawatha Business Center. Long-term plans could include a more extensive redevelopment, Tankenoff said, but for now the improvements have been enough to attract some new small and medium-sized tenants. Occupancy since last fall has risen from 15 percent to 50 percent.

Susan Feyder • 612-673-1723