Economy Watch: Remedies for Distress; Consumers Get More Nervous

Is creative repurposing a strategy for distressed assets? For an abandoned condo project in Chicago, the answer was "yes."

Until recently, 1260 W. Madison Street, a building on the near West Side of Chicago, was facing the prospect of sitting vacant indefinitely as its conversion from an industrial property to condos was rudely interrupted by the Great Recession. To some effect, however, it has been re-purposed back to industrial use and—more important—fully leased. Considering the volume of bad CRE loans, is this kind of re-positioning a harbinger of things to come, or a merely a rare good outcome for a distressed asset?

“The project illustrates how a loan sale can produce a positive result for all parties involved,” Wayne Shulman, senior vice president at HSA Commercial Real Estate Inc., which represented Chicago-based JRG Capital Partners L.L.C. in the deal, told CPE.  “All the pieces fell into place very nicely.”

The 45,000-square-foot building was a FedEx property acquired from a Milwaukee bank by JRG Capital Partners in a loan sale auction last year. The previous owners had planned to redevelop the structure into condominiums, but circumstances eventually put the property into the hands of the lender. Rezoning was required before the property could be repurposed for a commercial tenant, which turned out to be SkinnyCorp L.L.C., an Internet-based seller of custom-designed t-shirts. (Jones Lang LaSalle Inc. represented SkinnyCorp. in the lease.)

While banks are trying to unload REO or distressed mortgages, a few opportunistic investors are buying up distressed debt and offering to forgive the debt completely in exchange for the deeds to the underlying assets. That kind of deal gives the buyers property at a discount and the sellers an escape hatch, so it’s likely that there will be more deals like this.
But not every distressed property can be revived in this way, Shulman cautioned. “One important factor was that the building was in solid condition—it was not an incomplete redevelopment or halfway-built new construction project—and it had been previously used as a business facility,” he said.

University of Michigan Finds Consumers Glum Again

Consumer sentiment ticked downward by more than two points in mid-September compared with August, according to the Reuters/University of Michigan Consumer Sentiment Index, which was released on Friday. As of mid-September, the index stood at 66.6 points, compared with the end-of-August tally of 68.9. By this measure, consumers are about as now glum as they were earlier in the summer.

According to the survey, consumers assess the current situation to be about the same as they did last month, but are more apprehensive about the future. The expectations index, which is a part of the overall sentiment index, dropped to 59.1 in mid-September—the lowest since November 2008, when consumers were in a Chicken Little state of mind.

GSEs Now Big in Selling Houses

On the residential side of the distressed-property market, The Wall Street Journal reported over the weekend that Fannie Mae and Freddie Mac are now among the largest sellers of homes in the United States. The reason is that they have possession of so many. The GSEs have already taken possession of a lot of homes this year–almost as many in the first half of 2010 as during all of 2009.

Between them, the GSEs now own more than 191,000 homes, which is about twice as many as this time in 2009, according to the newspaper. The pressure is on to sell them–it’s expensive to maintain a large stock of vacant houses, after all–but selling them is no small order, considering the zombie-like state of many housing markets.

And there are more foreclosures to come. Citing figures from LPS Applied Analytics, the WSJ noted that Fannie and Freddie initiated about 150,000 foreclosures in July, or about 60 percent more than in April.

Wall Street had its own problems with expectations at the end of last week, and wobbled around all day Friday until the equities markets landed in barely positive territory. The Dow Jones Industrial Average gained 13.02 points, or 0.12 percent, while the S&P 500 was up a negligible 0.08 percent. The Nasdaq advanced a more substantial 0.54 percent.