Twin Cities commercial property foreclosures rise

Foreclosures of office buildings, stores, apartments and other commercial properties are continuing to rise in Hennepin and Ramsey counties, a sign that the weak economy and tight credit market continue to take a toll on the real estate market.

Commercial foreclosures still account for a small portion of the foreclosure total for the first half of this year -- just 3 percent in Hennepin County and 3.7 percent in Ramsey County. But in both counties, that's up from around 2 percent for 2008. And given that those properties can include everything from street-level storefronts to industrial buildings, the potential economic impact of one commercial foreclosure could far outweigh that of a single home.

Hennepin County's taxpayer services department reports 81 foreclosures for commercial and apartment buildings for the first half of 2009, a figure that points to a likely increase over last year's total of 138. Ramsey County also is on pace to exceed the 62 commercial foreclosures it had in 2008, with 45 already for the first half of this year.

The figures, which only include sheriff's sales of foreclosed properties, may understate the extent of the distress in the commercial real estate market. That's because borrowers in default sometimes agree to simply hand over properties to lenders to satisfy loans and avoid foreclosure. Jeffrey Larson, whose Eagan-based JBL Companies works with distressed commercial property owners, said his clients currently include 48 area properties in receivership, up from 12 a year ago.

Industry experts have predicted a surge in commercial foreclosures as the second wave of a real estate market meltdown that began a few years ago with home foreclosures. Realpoint Research, a Pennsylvania-based credit analysis company, recently reported a sixfold increase in the nationwide delinquency rate on commercial mortgage-backed securities, which are repackaged loans on hotels and retail, office and industrial properties.

Area real estate experts say they don't believe the Twin Cities market will experience the surge in commercial property foreclosures already seen in some parts of the country that had higher levels of speculative development. That includes California, Texas and Florida, which now account for about 30 percent of all CMBS delinquencies, according to Realpoint.

Dale Severson, a vice president at Coldwell Banker Commercial Griffin, said the area's commercial property market is still in the early stage of its foreclosure cycle. "We have not seen the worst of it and it could be around for quite a while," he said. Earlier this year, the Minneapolis-based firm launched a new business unit to focus on services for distressed properties.

Part of the reason more commercial foreclosures could be coming is that many real estate investors who bought at the top of the market with short-term debt are starting to have their loans mature and are having trouble refinancing, Severson said.

The rise in commercial foreclosures also is rooted in the economic slowdown, which has pushed up vacancy rates for office, retail and industrial properties. "You're seeing that in the office sector, with companies wanting to downsize and cut back on space," Larson said.

Even properties that haven't had big increases in vacant space may have had to cut rents in order to keep and attract tenants, Larson said. Either way, building owners' rental income has suffered, making it difficult for them to repay mortgage debt.

Richard Palmiter, a vice president at the Twin Cities office of CB Richard Ellis, said there's been a slight change from a year ago in the types of commercial properties taken over by lenders. Most initially were tied to the housing market and included either developed property or vacant land. Now more nonhousing properties, such as retail or office buildings, are starting to be foreclosed. Most are small, he said.

Minneapolis had the bulk of foreclosures in Hennepin County, but they also showed up in the suburbs. They included buildings in Maple Grove and Rogers that housed now-closed restaurants and a building supply store in Plymouth that had been an outlet of a chain that went out of business last year.