The distressed-sale epidemic has recently spread from residential to commercial properties. In an ominous harbinger of the troubled future, a private equity firm in San Francisco negotiated to cancel debt by delivering the lender a deed-in-lieu of foreclosure on a partially occupied distressed office property. The note was reportedly discounted to 40% of the current cost to construct the building.
In downtown San Francisco, the vacancy rate of office space increased to 14.1% in the second quarter of 2009, up from 13.2% in the first quarter. The average annual rent for Class A office space is $33.09 per square foot, down 12.4% from the three months prior.
This is a sequential manifestation of the troubled real estate industry. Residential properties were first to succumb to the foreclosure trend, and commercial properties are just now beginning to follow suit. According to Deutsche Bank, delinquency rates of commercial properties in the United States may rise as high as 6% in 2010.
first tuesday take: The problem here is the duress of a foreclosure without the open market participation of time available to locate a cash buyer. This conjures up a similar problem: whether REO sales should be considered when gathering comparable property statistics. A recent bankruptcy court case, accessible here, determined REO comps are not a reliable indication of fair market value since REO sales do not allow a ready, willing, and able buyer or seller the time in the market to negotiate and investigate before making their deal.
Re: “S.F. has recession’s 1st distressed office sale” from the San Francisco Chronicle