Commercial real estate concerns: One more look

We spent a couple posts last week focused on the Twin Cities commercial real estate markets and worries about a coming foreclosure wave and other problems similar to what’s hit the housing business.

We asked for feedback and got enough good stuff that we wanted to take one more run at these issues. (We’re always interested in more voices, so if you have some insights on commercial real estate in the metro area and beyond, drop us a line. If we get more good insights, we’ll post again.)

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The basic questions we’ve asked: How deep are the problems in commercial real estate in the Twin Cities and around Minnesota?

Are we headed for a spike in foreclosures as commercial owners deal with vacancies and struggling tenants? What will take to avoid more, serious problems?

There’s a “light at the end of the tunnel” view at the University of St. Thomas. The school’s new commercial real estate survey shows “signs of recovery over the next two years” in commercial real estate.

The results are based on answers from a group of 50 people connected to retail, office and industrial space in the Twin Cities, responding to questions in April about the health of the market by 2012.

“These people are expecting steady, moderate growth for the next two years.” said Herb Tousley director of real estate programs at University of St. Thomas.

“Nobody felt like it was going to turn around overnight and be booming in six months. People did seem to think we’re turning the corner…”

This is the first of what will be twice-a-year surveys. Tousley says it will need “5-6-7-8 data points to be statistically significant.”

Still, he notes that Minnesota’s employment health will be the key factor in how commercial real estate fares.

“It all follows jobs and unemployment. If people go back to work and employment increases, that means there’s a need for more office space. Everybody seems to think that employment is going to get better. But it’s going to be a long climb out.”

No doubt there. While the latest Minnesota jobless numbers showed marginal improvement , Creighton University’s most recent analysis estimates it will be three more years before Minnesota returns to its pre-recession job levels.

Experts in MPR’s Public Insight Network have offered us some great perspective on the current state of the real estate markets. That includes Twin Cities banker Hans Hansen.

“The bigger issue with commercial real estate (and banks’ balance sheets in general) is the amount of Other Real Estate Owned on banks balance sheets,” says Hansen.

These are residential and commercial properties that banks have foreclosed on and taken back from the original borrower, he wrote us on Saturday. “In general, this real estate is supposed to be sold off in a prompt manner (usually one year), as this represents a ‘non-earning’ asset on the banks’ balance sheets.”

I have a summary of 77 Twin Cities community banks results for the year ended 12/31/09, as well as their balance sheets. These figures were obtained from the call reports from these 77 institutions. As of 12/31/09, these banks had a total of 24% of their capital (or owner’s equity) in OREO.

Now this is a big problem, as these assets are not only not earning the bank any money, they are COSTING the banks money due to insurance, taxes, attorneys fees, and other holding costs the banks must incur to maintain the OREO until it is sold.

Even though the Fed is keeping interest rates low so banks can ‘earn’ their way out of this recession, there are not many businesses that can afford to keep that much capital not earning money for the company.

Hansen sees these problems continuing until banks can earn enough to offset the write offs they’ve taken — and may have to take in the future as they see the real estate they own “into a market with drastically lower values than when they took it on to their books.”

6/9 UPDATE:In the Federal Reserve “Beige Book” report today, the Minneapolis Fed notes the region’s commercial real estate difficulties:

Commercial real estate was slow. The amount of unused space in the retail market in Minneapolis increased by 135,000 square feet during the first quarter. An industry contact in northern Wisconsin noted that nearly every sector in his area was overbuilt.

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Got another view on the commercial real estate markets? Post your insights below or contact us directly.

Here are the posts from last week:

>Commercial real estate concerns: Two more views

>Commercial real estate problems looming?

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    I’d have to agree with your post. Which is not something I will usually do! I love reading posts that will make people rattle their head. Also, thanks for allowing me to comment!