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Costar Provides Data on the Distressed Property Market April 21, 2010

Posted by Erik Swanson in Uncategorized.
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Seeking Clarity: 10 Quick Observations On the Distressed Property Buying Market

Risk Is Back in Favor as Bottom Prices Appear To Have Stabilized

By Mark Heschmeyer

April 21, 2010

The first thing to know about the distressed property market is that risk appears to be back in favor this year after buyers sat on the sidelines in 2009.

CoStar Group examined 2,375 distressed property sales of more than $2.5 million that closed between Jan. 1, 2007 and March 31, 2010. In the first quarter of this year, CoStar data shows 184 deals have been reported so far. That compares to 102 in the first quarter of 2009. The higher number this year is more in line with the number of deals done in the first quarters of 2008 and 2007 when there were 187 and 189 respectively.

The $2.17 billion volume this year is also more in line as well with first quarter results in the previous years. The lowest dollar volume for the first quarter of any of the last four years was $1.82 billion.

For purposes of this analysis, CoStar Group used the following reported sales conditions as indicators of distress: auction sale, building or soil contamination, building in shell condition, condo conversion, deferred maintenance, distress sale, high vacancy property, redevelopment project and/or REO sale.


Properties with deferred maintenance issues made up the largest proportion of distressed sales, showing up in nearly one of every four purchases. High vacancy properties accounted for nearly one of every five deals. Other categories were as follows.

  • Redevelopment Project, 347 deals
  • REO Sale, 313
  • Distress Sale, 301
  • Condo Conversion, 147
  • Auction Sale, 134
  • Building in Shell Condition, 96
  • Building or Soil Contamination, 34

Hot, then Not

The appetite among investors for distressed conditions has shifted throughout the recession. For example, the majority of condo conversion sales (113 of them) occurred in 2007. There have only been two so far this year. Purchasing properties with deferred maintenance were also twice as popular in 2007 as they have been recently. On the other hand, the number of REO sales jumped nearly 500% in 2009 over the previous two years and the number of distress sales nearly doubled. Both types of sales have been occurring at a higher pace this year compared to last year.

Distressed Multifamily Prices Stable

Multifamily properties were the clear first choice of distressed buyers accounting for 752 deals. Other categories were as follows.

  • Office, 485 deals
  • Retail, 471
  • Flex/Industrial, 420
  • Mixed Use, 132
  • Hospitality, 115

The average price paid for distressed multifamily properties plummeted sharply with the onset of the recession in 2007 but by 2008 found a steady bottom trading range. The average price has traded steadily in range between $50,000 and $100,000 per unit on average. Nondistressed multifamily properties have been selling in a range between $78,000 and $115,000 per unit on average.

Office Prices May Have Bottomed

The peaks and valleys of distressed office prices were both trending down from 2007 through most of 2009. But the price range has narrowed in the last two quarters with top prices falling and the bottom price rising slightly. Since September 2009 distressed office properties have been trading in a range from $70 to $140 per square foot on average. In that same time period, nondistressed office properties have been selling in range between $110 and $200 per square foot on average.

Retail Prices Still Trending Down

The top price paid for distressed retail properties appear to be edging higher at this point in time. However, the floor prices still seem to be falling. The wider swings between peaks and valleys appears to be factors related to location and/or property types with some months being heavily weighted to regional mall sales or in high-dollar markets. Since December 2009 distressed retail properties have been trading in a range from $45 to $100 per square foot on average. In that same time period, nondistressed retail properties have been selling in range between $105 and $500 per square foot on average.

Distressed Industrial Prices Steady

In early 2007, distressed industrial properties were trading consistently in a range of from $20 to $80 per square foot. There was short-lived rally in industrial prices in late 2008 and early 2009. Today the price bottom is still about $20 per square foot but the trading has narrowed to a range of about $40 per square foot tops on average. Nondistressed flex and industrial properties have been selling in range between $40 and $85 per square foot on average.

Hospitality: Betting on Casinos

Three of the largest distressed sales since 2007 were for casinos in Las Vegas with the 2,885-room Treasure Island Hotel Casino going for $775 million or about $268,631/room in March 2009; the 2,567-room Planet Hollywood Resort and Casino going for $243,218/room in February 2010; and 1,878-room Tropicana Resort and Casino going for $234,292/room in March 2007. Overall, distressed hotel prices have been selling in a median range around $100,000/room. The average price of nondistressed hotel prices has been rising in the last four months going from a low of $40,000/room in December 2009 to about $210,000/room last month.

Local/Regional Buyers Most Active

Multifamily: Regional developer/owners were the buyers in three out of every 10 distressed multifamily sales since 2007, followed by individuals at 22%, national developer/owners at 17% and investment managers at 9%. In the last six months, regional developer/owners have increased their share to nearly 40% of all deals, grabbing share from everyone else.

Office: Regional developer/owners have made up more than 26% of the buyers of distressed office properties during the recession years followed by national developer/owners at 17% and then individuals and corporations at 14% each and investment managers at 11%. In the last six months, investment managers have decreased their share to less than 5%, while banks and government entities have increased their share of purchases.

Retail: Regional developer/owners were involved in 25% of all retail/shopping center distressed purchases since 2007, followed by individuals at 19%, national developer/owners at 18%, and corporate entities at 15%. In the last six months, national buyers have decreased their share of activity to about 11%, while banks and government entities have increased their share of purchases.

Industrial: Regional developer/owners were involved in 23% of all flex/industrial distressed property purchases since 2007, followed by closely by corporations at 20%, then national developer/owners at 16%, and investment managers and individuals at 11% each. In the last six months, corporations have jumped into the lead as buyers accounting for three out of every 10 buys with regional developer/owners following closely at 28%. Investment managers’ share has fallen to 8%, with individuals now accounting for less than 4%.

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