Lexington, KY - The pending maturity of low-to no-equity and interest-only loans, a decrease in property values and retailers shuttering anchor stores have inspired wide speculation of the bursting of nationwide commercial real estate bubble.
But while the nation might be hard hit in the next 20 to 30 months and local industry insiders concede hard times in the Lexington market, the Bluegrass region seems poised to weather the storm better than most. "Sluggish is a good word; sluggish is a better word than crisis," said Tim Haymaker, founder of Haymaker-Bean Commercial Real Estate, when asked to describe the state of Lexington's commercial real estate market. "We're working with our tenants as best we can. Some of them can't be helped; some of them can."
Haymaker, who used the recession of 1990 to build up his portfolio, said the fate of many developers and landowners rests with the banks that hold their loans.
"(Landowners) are going to have to have some cooperation from the banks Ö They can either help solve the problem or make it worse," he said.
And, Haymaker added with a rhetorical question, "what's the purpose of making it worse?"
Haymaker said he owns most of his properties outright because he got into them at a time when prices were low and banks were willing and able to make deals despite the economy. He hopes, for the sake of others in his line of work and for the economy as a whole, that banks don't take the same approach they did when the residential real estate market bubble burst in 2007-08.
"I see them taking people out of houses all the time, and then they sell them for 60 cents on the dollar or 50 cents on the dollarÖ The person who they dislocated could have easily made those payments if they were going to give them 50 percent, so why cause all the disruption?" he said.
To this point, central Kentucky banks have been working with their commercial borrowers, according to bankruptcy attorney Elizabeth Thompson of Stites and Harbison.
"All the banks in this region have been working with their borrowers, and they've all been modifying the original terms and getting the loans in some sort of status where they can perform," said Thompson.
While the banks have been assisted by an October policy change by the FDIC to make restructuring loans easier, Thompson said bad loans that would allow developers to essentially walk away have incentivized banks to play ball with their borrowers.
"As long as they hadn't guaranteed the loan, why not (declare bankruptcy)? At this point, there is no upside for the developer anymore," she said.
Many of the loans coming due nationally were fully financed, and some were interest-only. So with intelligent corporate structuring, developers could walk away from failed developments without losing so much as equity. That would leave banks with a depreciated property that they would have to manage and secure until they could eventually unload it.
"Why bother with all the grief if there is no upside for you. The banks, they're willing to work with people, (because) there is a lot of grief involved," Thompson said.
All this is coming at a time when asking rent fell 0.6 percent at malls nationally in the first quarter of 2010, its sixth straight quarterly decline, and 0.3 percent at shopping centers in the first fourth of 2010, according to a report from research firm Reis Inc.
Nationally and in Lexington, shopping centers have felt the pinch from the bankruptcies of Circuit City, Linens 'N Things and Goody's, while drops in consumer spending have made it more difficult for the remaining retailers to cover their rent.
Despite some large retailers shutting down in Lexington shopping centers, Al Isaac, president of NAI Isaac, said area centers are fairing well.
"There is some restructuring (of loans) going on, but my sense of it is there is still not as much as is going on in a lot of other areas," Isaac said. "We do an awful lot of lender work in the market, so we've got a reasonably good handle on the amount of that going on in our market, and if you read the national publications, you would think every commercial property in any market is having trouble, and that's just not the case."
Much of that is due to rents staying flat. While, by and large in Lexington, rents are not increasing as developers would prefer, they aren't going down either, according to Isaac.
"Some (rents have declined) in select situations, but I don't think we've seen wholesale lowering like there has been in some areas that were hit much harder than the Lexington area has been," he said.
Locally Isaac estimates current vacancy at around 10 percent, down from 10.5 percent, which an NAI Isaac survey found as Lexington's 2009 year-end rate.
"My guess is that's been slowly dropping, too, just based on absorption and lack of construction," he said.
Dinsmore & Shohl commercial real estate and lending attorney Brady Dunnigan credits the area's ability to hold down the fort during these tough times to Lexington's tight controls on growth and zoning.
"We're in as good a position as any of these cities are to weather a recession of this nature. We have a broad-based economy, we have a pretty central geographic location, and we've done a good job in this area controlling zoning and development, so there's not the kind of overbuilding Ö that you have, say, in the Nashvilles and the Cincinnatis," he said.
His Dinsmore partner on the bankruptcy side, Ellen Arvin Kennedy, said the fact that Lexington retail centers serve more than just Fayette and surrounding counties has kept them not only off her desk but viable.
"In terms of commercial business, Lexington, for the most part, services everything east of here," Kennedy said. "We get a lot of people coming into Lexington for shopping and restaurants and things that feed into our economy. So at any given time, we have people coming into Lexington to do business here, as opposed to only servicing those people who actually live here."
Developer Dennis Anderson has seen projects near the outskirts of Lexington slow in spite of having sold or secured active leases. Although nearly 90 percent of property around one of his projects on Richmond Road near Man O' War is not built, he's had at least 60 percent of the property under lease since last April.
National used-car dealer CarMax took lease of six to seven acres of the property 12 months ago, Anderson said. Though CarMax has not begun construction on the dealership, nor do they appear ready to do so any time soon, they've been paying their rent monthly for the land.
"As a company, we've been very blessed," Anderson said. "We've got half of that Richmond Road site (leased, with) nothing really happening on it, but we're blessed that even though CarMax hasn't built, we're receiving income. And it's significant income; it's hundreds of thousands of dollars."
Anderson has sold out his mixed-use commercial and residential Townley Park complex on Leestown near New Circle. Only one tenant at the complex has had to close shop, Anderson said, but that tenant is still paying rent. And he has also sold out the first phase of the Providence Business Center on Newtown Pike, which has slowly been coming to life.
He said that when CarMax does eventually begin construction, that will help him to unload the rest of the available space at the Richmond Road site, and he's been pleased with how his company, Anderson Communities, has done despite the economy. Asked if he'd planned to be further along on the Providence Business Center at this point, Anderson responded with a relieved laugh, "No. I'm shocked that we are where we are, to be truthful."
Even though Isaac has seen an increase in lease interest and activity on the retail side with every passing month, Stites and Harbison's Thompson thinks neither Lexington nor the nation, will see retail stores ever rebound to their pre-downturn numbers.
"Brick-and-mortar retail was already becoming challenged by Internet sales," she said. "Baby Boomers were the big spenders in (brick-and-mortar) retail, and they were even paying for their children to be big spenders in retail. And Baby Boomers all have seen the stock market go down and their 401(k) accounts diminish and their stock holdings diminish, and they're all getting ready to retire. Older people don't spend that much money, and they don't shop."
But Thompson was quick to point out that, by nature, she's no optimist.
"I'm a bankruptcy attorney, so I'm the most pessimistic human being on the face of the Earth, because I have never seen a loan perform," she said. "I've been practicing law for 28 years, and I've handled thousands of cases and thousands of workouts, and I have never seen a performing loan, because if it were a performing loan, I wouldn't see it."