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REOs, Short Sales Picking Up as Phoenix Area Lenders and Investors Compromise

Lenders with reasonably sound balance sheets are more actively looking to dispose of distressed small-balance commercial real estate assets in the boom-and-bust Phoenix area, and are dropping asking prices to make deals happen.

Meanwhile, opportunity-minded local investors that had not responded favorably to the prices at which banks have been asking are also starting to get more aggressive, accepting lower returns in order to win the competition for available assets.

The result: a budding pick-up in trading of small-balance real-estate-owned properties and short sales of modest-sized distressed projects.

Veteran retail property broker Greg Abbot sees lenders concluding that the latest local bust has bottomed out - and they're getting serious about disposing of REOs and negotiating short sales.

While some banks are holding out for better prices ahead and, in the meantime, are actively trying to lease up gaping vacancies, many others have concluded that values won't see much of an uptick any time soon. Accordingly, they're opting to book their losses now as they dispose of assets.

In fact, distressed small-balance loans generated all three of the Phoenix retail property sales that closed in recent weeks. And clear indications of increased pre-foreclosure activity suggest more such deals to come, says Abbot, an agent with De Rito Partners.

Abbot brokered one of the deals, the $1.1 million short sale of a never-occupied ("grey-shell"), three-year-old strip center totaling 16,718 square feet, and known as The Shops at Fiesta Ranch, in suburban Gilbert.

The San Diego-based developer had still owed a national construction lender roughly $3.2 million when Abbot got the listing some 18 months ago. And after there were no takers at the original listed price of $3.5 million, the bank eventually opted to cut the asking price in half and pursue enforcement of recourse guarantees.

A local family group operating as Guadalupe Retail LLC won the bidding, which included eight serious offers. In addition to funding tenant improvements, the buyer will need to spend additional dollars installing an HVAC system in the complex at Guadalupe and McQueen roads.

Meanwhile in the wake of the three recent shopping center sales, the last week of April saw another small-balance short sale and a small-balance REO disposition by a conduit loan special servicer - both relatively rare occurrences to date in the Phoenix vicinity outside the hard-hit hospitality sector.

In the other short sale, a local group operating as Rancho Encanto Apartment Partners LLC outbid 20-some interested parties in acquiring the namesake 144-unit apartment complex in Phoenix for $5.3 million.

The original asking price had exceeded $7 million for the 1980s-vintage property along North 35th Avenue plagued by roughly a 25 percent vacancy rate. The new owners are planning to invest another $3,000 per unit in improvements.

And Los Angeles-based opportunist ESI Ventures just picked up the nearly empty 71,200-square-foot Mercado del Rancho class B office complex in north Scottsdale for $4 million - less than half the price at which it last traded in 2004. It was an REO sold by an affiliate of CMBS trust special servicer CWCapital.

As this property at 92nd Street and Shea Boulevard is near Scottsdale Healthcare Shea Medical Center, the new owners expect to replace former anchor tenant CVS Caremark with other health care-related operations.

As for the boost in short sales and REO dispositions, Abbot perceives that some investors have simply grown weary of waiting for lenders to drop their asking prices, and they're opting to bridge the bid-ask gap by settling for lower returns than they'd initially projected.

"They're not making anything on capital that’s not invested, so some are willing to reduce their expectations and compromise to get deals done," he elaborates.

Savvy local buyers are typically basing bids on discounted cash flow analysis, factoring in assumptions about asking rents, concession costs and stabilization schedule among other variables, Abbot adds. Over the last 12 months, for instance, small-cap rents in Phoenix have declined between 9% and 13% depending on the property type, according to Boxwood Means.

And no doubt it helps these buyers that the economy and, in turn, tenant demand are at least showing some promising signs of recovery.