Commercial real estate: How low can it go?

Sports are an apt metaphor for life because of the simplicity behind the idea that in sports—as in life—there are winners and losers. It’s inevitable; simple as that.

Recently we watched as Japan won the Women’s World Cup in a thrilling comeback victory against the American team. Japanese fans were naturally elated while the American fans were heartbroken. Truth is, the biggest hurdle the US players are likely to face is overcoming the disappointment of the loss itself. But, alas, life isn’t that simple when it comes to the major correction of commercial real estate in Las Vegas.

We’re all too familiar with the myriad stories about people who, because of an adjustable rate mortgage or job loss, have lost their home to foreclosure. But the bursting housing bubble depressed the economy and ultimately spread to the commercial side of the real estate equation that already had a glut of space from overbuilding during the Las Vegas boom market. Businesses closed or wanted to relocate to pay cheaper rent. Landlords of office, industrial and retail properties subsequently lost tenants and couldn’t afford to make their loan payments or banks wouldn’t extend loans made prior to the recession.

Banks foreclosed on those property owners, extinguishing a life’s work sometimes valued at millions of dollars. Just like that. In many cases, lives were devastated and changed forever.

On the flip side, the Great Recession created opportunities for others who had nothing to do with the demise of the previous owners, and they’re swooping in and buying office, industrial and retail properties and land, and stand to make millions in profits if they guessed right. It all sounds like a game, but this is one in which the stakes are high. And, in some cases, the consequences have been deadly.

Only last August, Las Vegas real estate developer Donald Romano, 74, and his wife Barbara were found dead in their Summerlin home. Police called the case a murder-suicide after a gun was found in Donald Romano’s hand. He also left a note. The tragedy came about a month after Romano lost possession of his Pine Corporate Center on West Charleston Boulevard, an office complex of 18 buildings totaling 100,000 square feet.

It’s an extreme and tragic example of the impact the commercial real estate industry’s fallout has had in Las Vegas, said Frank Gatski, the CEO of Gatski Commercial Real Estate Services.

“This was his whole life. It was his pride and joy, and it went into receivership,” Gatski says. In a lot of cases, investors did everything right. It’s not like they were gambling and throwing money out the window.”

Commercial development has served as one of the driving forces of the Las Vegas economy during the boom, but is at a near standstill with millions of square feet of oversupply and a complete lack of demand with businesses closing and cutting back on their space needs. A lagging indicator, commercial real estate will be one of the last sectors to rebound once the economy improves and additional space is needed.

For every loser, there’s a potential winner in commercial real estate as lenders and holders of debt start to foreclose in greater numbers and sell them to buyers in the US and abroad who’ve been waiting on the sidelines to buy at bargain prices. Las Vegas has the highest percentage of distressed commercial real estate in the country by far, according to New York-based Real Capital Analytics. In its most recent report, it reported nearly $19 billion in distressed properties, which includes more than $4 billion in properties that have been foreclosed upon.

Interest has been strong, as noted in a May online auction of commercial real estate in Nevada, most of it in Las Vegas. About 85 percent of the properties and notes up for auction were sold for $340 million, according to Auction.com. Investors are apparently trying to capitalize on the opportunities in Vegas to become the next round of winners, and that includes Romano’s Pines Corporate Center bought out of receivership last month. Newport Beach-based MIG Real Estate acquired the office complex on the 7200 block of West Charleston Boulevard. It’s the firm’s fifth acquisition in Las Vegas since October 2010.

Although such groups aren’t necessarily getting a steal, they’re buying properties at good prices and plan on holding them and making improvements to enhance their value over the long term. Dan Fasulo, managing director of Real Capital Analytics, says private investment groups such as MIG Real Estate are an example of what’s happening in the market.

“These are guys who’ve been in the industry a long time and know how to buy right and create value and execute a leasing strategy,” Fasulo said.

A few weeks ago, Lightstone Acquisitions, part of the Lightstone Group, a New York-based real estate investment company, acquired 23.54 acres at the Las Vegas Beltway and Hacienda Avenue for $4.4 million. The firm bought the property from City National Bank, which foreclosed on Newport Beach developer Dominic Magliarditi, who planned a mixed-use development when he bought it in November 2007 for $30.2 million. Lightstone plans to hold the property as an investment.

Rick Myers, president of Thomas & Mack Development Group and a consultant for Nevada State Bank, said at a recent conference that the bank has sold 85 distressed properties worth $120 million. About 85 percent were vacant land and many deals ranged from $700,000 to $1.5 million, with some exceeding $10 million, Myers says. About 85 percent of the deals were offshore investors paying cash.

Mike Mixer, the managing partner of the brokerage firm Colliers International Las Vegas, says he has clients with a heavy debt load who are losing properties they invested in and other clients with well-funded checkbooks who are giddy at the opportunities. Mixer says Las Vegas is only midway through its commercial mess and a lot of properties have yet to hit the market. Banks had initially been trying to extend terms with property owners but have come under increasing pressure from regulators to deal with the problem; thus, an increase in foreclosures is imminent.

“It’s like the residential market, but not as much volume,” Mixer says. “One person’s pain is another’s gain. The foreclosure mess continues to weigh heavily on value. There’s more distress coming on the market.”

Land prices fell by 60 to 80 percent, office properties have fallen by 40 to 70 percent; industrial by 40 to 60 percent and retail properties by 40 to 80 percent.

In all of this pain, who’s actually been hurt the most? Retail centers without an anchor tenant.

Las Vegas got hurt by the easy access to capital and euphoria over the economy that prompted overbuilding, especially by those who weren’t experienced at developing. Vacancy rates continue near record highs, with office just below 25 percent by most accounts, industrial vacancy more than 15 percent and retail vacancy more than 10 percent. Both retail and industrial were in low single digits before the recession, and the office vacancy was below ten percent.

Colliers International reports there is more than 9.4 million square feet of vacant office space, 5.3 million square feet of vacant retail space and some 16 million square feet of vacant industrial space.

“There’s a lot of stuff that should have never been built, said Fred Chin, president of the Atalon Group turnaround firm. “There were a lot of unknowledgeable and inexperienced people who became developers, even doctors. A lot of people got wiped out in Vegas, and there are others who are a lot less rich now. And there are still others who are taking advantage of the idiots who made the loans and developed the properties by buying them cheap.”

“Who are the losers?” Everybody,” says Kirk Boylston, regional director for EJM Development, which built the Arroyo mixed-use development in southwest Las Vegas. “Even people who still have property are doing OK, but they’re not doing as OK as they once were. There’s been too much rental erosion. But even though nobody’s doing as well, some are much better than others.”

What’s happening is a lot of private equity firms are hovering, waiting to acquire the properties that go on the market or buy loans from financial institutions or investment banks. They could ultimately foreclose on the properties. Las Vegas is one of the last markets to start clearing properties on the commercial side after values have fallen steeply, Fasulo said.

Many in the investment community are convinced that the worst is over, and that’s encouraging them to be more willing to step in and make purchases and banks more confident to put properties on the market.

“There are people who believe in Vegas and think it’s at the bottom, and going to get better,” Chin says.

That doesn’t help those who lost everything to the downturn in commercial real estate.

Those hurt the worst are property owners who had a personal guarantee on their loans, says Joe Kupiec, the managing director of brokerage firm Grubb & Ellis.

“Some of the stories are rather depressing and lot of people who’ve done significant development over the years and had done very well became overleveraged and got caught,” Kupiec says.

One of those feeling the pain is Angelo Tourlis, who came to Las Vegas in 2001 from Chicago, where he owned three bars with family members before selling them and retiring. Tourlis used the proceeds from the bars to get involved in real estate investment.

At first he bought town homes but quickly sold them and made other investments in commercial property, including land. By the middle of the decade, he graduated to buying a restaurant on North Durango Drive that was occupied by Bob’s Big Boy. He also acquired an 11,000-square-foot office building on Eastern Avenue near the 215 Beltway. Between the two, the deals were worth about $5 million. Tourlis, a Greek immigrant, poured the nest egg he worked his whole life to build into the properties and lived off the cash flow they produced.

But when Bob’s Big Boy filed for bankruptcy in 2009, he was unable to rent it out and when tenants at his new office building didn’t occupy space, Tourlis wasn’t able to pay his mortgages. He has since moved back to Chicago and says it’s devastated his life. He’s also in the middle of a divorce.

Gatksi, who tried to help Tourlis, says it’s one thing to see people fail who were too greedy, but to see it happen to individuals who were conservative and went by the book and were still hurt is difficult to watch.

“This market has brutalized a lot of families. These are people who’ve worked hard their entire life to accumulate wealth,” Gatski says. “Angelo Tourlis was living the American Dream and didn’t do anything wrong except buy at the wrong time.”

Tourlis says he still owns a condominium in Las Vegas that he’s trying to sell but has no interest in getting back into the commercial real estate business. He said he’s too old and broke.

“I’m 80 years old, and it’s not easy,” Tourlis says. “I did nothing wrong, but it cost me. My life has turned upside down, and I’m going to end up by myself.”

Winners and losers. No one said it was fair.