We made it through the pandemic and a downturn in commercial office demand relatively unscathed in terms of banks electing to not foreclose on smaller office buildings. Generally speaking, the office buildings that have been foreclosed upon across the country have been older, much larger high-rises.
This was not always the case, however, in the years after the great recession. In 2010 through 2012, banks did foreclose on smaller, mostly vacant, owner-user office and flex buildings where the owners stopped paying loan payments and moved out of the buildings. Below are three examples of buildings that were foreclosed upon where the bank turned to us to sell the buildings at a time when very few people were buying.
Wells Fargo Sale 2010
Wells Fargo hired us to sell a small office building within a business park in South Orange County. Buyers were few and far between, but we were able to source and secure an attorney buyer who believed in the long-term value of the asset. We highlighted the low purchase price vs. much-higher replacement cost. It was demonstrated to him by us and our financing partner that with a long-term fixed SBA loan the decision to purchase was far superior to leasing. We also worked with him and an architect on a plan to divide the building with a common-bathroom core, so he was able to get a small tenant to help supplement the loan payment.
His faith in the market returning was rewarded in 2015, when he asked us to resell the building for him and we were able to achieve a price premium more than 55% higher than what he paid in 2010.
Bank of America Sale 2011
Bank of America foreclosed on a small flex building, also in South Orange County, and hired us to sell the asset in 2011. It was of high importance to the bank to move the building quickly, so our marching orders were to price it such that we would attract multiple buyers as soon as we made the listing public. We generated three offers in two weeks, qualified them, and chose the buyer who was most likely to perform. They did, and the bank was able to get the building off their books in short order.
GE Capital Sale 2012
GE Capital saw that we sold the building for Wells Fargo in 2010 described above, and they had foreclosed on another building in that same South Orange County business park. It was 2012 and buyers were still somewhat scarce, but there was a general sentiment at the time that the bargain-basement pricing couldn’t last forever. We priced this building higher than the one we sold for Wells Fargo in 2010, and with the beginning stages of market optimism we were able to generate four offers. With four offers in-hand, we facilitated a bidding war and drove the price higher. This GE Capital building – largely the same as the Wells Fargo building from 2010 – sold for $35/sf higher.
We were pleasantly surprised to find that during the most recent market crisis – the pandemic followed by a dramatic spike in interest rates – has not resulted in a wave of foreclosures for smaller office and flex properties. For the most part, these low-rise and mid-rise assets have held strong in their pricing and owners seem to have continued paying their loan payments.
The difference this time around is that despite the slowdown in office occupancy and the increase in the cost of capital due to rising interest rates, businesses themselves in the office and flex world have been much stronger than during the great recession and the years afterwards. Many of the smaller office and flex buildings are owned by owner-users who, with businesses still intact, have been able to keep up with loan payments.
Other than owners of older high-rise office buildings, the smaller office and flex market seems to have dodged the foreclosure bullet this time around.
