Colorado-Real-Estate-Journal_408466

July 3-16, 2024 - Page 27 www.crej.com 50 YEARS OF SERVING PEOPLE BETTER For half a century, SVA has been the backbone of success for countless businesses just like yours. Our journey over the last 50 years has instilled us with wisdom, resilience, and adaptability, but our vision for the future and our unwavering commitment to excellence is what truly invigorates us. You need a partner who can help you achieve your own vision and goals for the future. Work with us and experience our… 50 Years of Understanding the Real Estate Industry 50 Years of Experience with Unique Housing and Real Estate Tax Credits 50 Years of Providing Clients with Measurable Results Bring Us Your Vision, We’ll Help Make It a Reality. SUCCESS STARTS HERE! Measurable Results. ® SVAaccountants.com AUG2023-AUG 2024 USA Law & Accounting I n the world of commercial real estate, upside-down commercial loans on office prop- erties emerge as both a challenge and an opportunity for industry experts. These loans, often dis- creetly sold to distressed loan buyers in off-market deals or reclaimed by lenders through deed-in-lieu of foreclosure trans- actions to avoid foreclosure, con- stitute a unique market segment that demands a savvy approach. Real estate markets witness a delicate dance between lend- ers foreclosing on office loans and engaging with loan buy- ers to sell these loans before full foreclosure. This proactive strategy aims to minimize losses and expedite recovery. Major players, armed with substantial capital reserves, often pursue distressed loans where add- ing value is a key driver. Their financial strength affords them the luxury of patience, allowing them to revitalize aging office assets and reposition them as contenders in the fiercely com- petitive office leasing arena. In real estate, the three L’s (location, location, location) still hold true. Nowhere is this more evident than in mature office markets like Chicago, where scarce new land amplifies the value of well-situated proper- ties. For distressed loan buyers, the imperative is clear: Conduct comprehen- sive perfor- mance analy- sis and due diligence on u n d e r l y i n g assets swiftly. The race for coveted dis- tressed assets is intense, favoring only the most dili- gent and agile actors. Colorado is no stranger to dis- tressed office situations either. According to Hoff & Leigh’s Denver Q1 Office Market Report: n Vacancy rate. As of the first quarter, Denver has one of the highest vacancy rates among major U.S. markets, standing at 16.7% partly due to low office utilization, especially among workers who have embraced hybrid arrangements. n Occupancy decline. Since 2019, Denver’s occupancy has declined by 6%, reflecting the impact of changing work dynamics. n Lease trends. Leases signed in fourth-quarter 2023 averaged about 3,100 square feet, repre- senting a 45% decrease in aver- age lease size since its peak in 2015. Companies are adjusting their footprints, leading to small- er space-per-worker require- ments when leases expire. n Construction activity. Despite demand pullback, con- struction activity has surged to levels not seen since 2017. Developers aim to capitalize on tenant demand for new, high- quality office spaces. Buildings constructed after 2020 are ben- efiting from leasing demand, while older buildings face chal- lenges. n Tenant leverage. Denver’s office market remains tenant- favorable. Tenants negotiate steep concessions and higher tenant improvement allow- ances. Built-out sublease space offers a 30% discount relative to direct space. n Investor demand. Investor demand has been suppressed due to market uncertainty. Investment volume in the past year was down by 60% from its five-year annual average, indi- cating a correction in property values of at least 20%. Opportunistic loan buyers stand to profit, especially as new office construction slows in areas grappling with high vacancy rates or where new construc- tion prices out certain tenants looking to reduce costs. Success hinges on meticulous evaluation of potential acquisitions. Some lenders in the process of fore- closing on loans willingly share extensive data on office proper- ties and loan performance with prospective buyers, often under nondisclosure agreements. Sophisticated buyers leverage this wealth of information to scrutinize among other things: financial records, lease agree- ments, deferred maintenance logs, insurance loss reports and real estate tax information. However, the window of oppor- tunity is narrow; decisive action and acceptance of higher risk are prerequisites for success. Despite inherent risks, astute buyers flush with cash can reap significant rewards. A well- calibrated pricing strategy and deep market understanding can lead to lucrative deals. As new construction wanes or the cost for Class A office space becomes unviable for some, demand for existing office spaces will rise, creating a golden opportunity for those who are adept at navi- gating distressed loans. Real estate professionals eye- ing the distressed loan market must be agile, informed and willing to take calculated risks. The potential rewards are sub- stantial for those who grasp the market intricacies and move swiftly to capitalize on emerging opportunities. As the industry evolves, staying ahead of the curve remains paramount for success in the realm of upside- down loans and distressed assets. The following list illustrates common risks associated with distressed commercial loan acquisitions with corresponding risk mitigation strategies: n Market risk. Market fluc- tuations can impact property values and rental income. ● Mitigation strategies. Diversify across different prop- erty types and geographic locations. Conduct thorough market research to understand trends and forecasts. n Property condition risk. Distressed properties may require significant repairs or renovations. ● Mitigation strategies. Conduct thorough property inspections before acquisition. Budget for necessary repairs and factor them into the pur- chase price. Budget for contin- gencies during property man- agement. Maintain sufficient capital reserves to cover unex- pected costs. n Legal and title risk. Liens, encumbrances or unclean title can lead to legal issues or dis- putes, or both. ● Mitigation strategies. Per- form title searches and resolve any issues before closing. Work with experienced legal profes- sionals. n Operational risk. Manag- A strategic guide for buying distressed office properties Jeff Friedman Partner, Hall Estill Please see Friedman, Page 40