Commercial real estate on the rebound


April 06, 1994|By Timothy J. Mullaney XTCSO: Sun Staff Writer

Sooner or later in the economic recovery, someone had to write the headline that Salomon Inc. put on its new study of commercial real estate:

"Commercial Real Estate: Losing Its Stigma?"

Salomon's point is that fewer and fewer real estate developers are deadbeats on their mortgages these days, as the improving economy, interest rates that are the industry's lowest since 1968 and restructured loans help more of them keep up with their payments.

Of course, the fact that the worst deals have mostly been foreclosed on by now helps, too.

The drop in delinquencies on office building mortgages made by insurance companies is especially striking, analysts Margaret M. Alexandre and Alfred M. Capra write. Only 5.7 percent of office building loans were delinquent at the end of 1993, down from 8.5 percent a year earlier.

Overall, commercial real estate delinquencies are at 4.5 percent, off from 6.6 percent.

Retail is the healthiest commercial sector, and the Middle Atlantic States have the lowest overall delinquency rate.

A healthy real estate sector is important to the health of insurance companies, which have 15 percent of their assets invested in commercial mortgage loans and real estate equity positions, Salomon said. And while that percentage is continuing to fall -- it was 17 percent at the end of 1992 -- some insurers are beginning to make new real estate loans.

"Spreads are as much as 300 basis points more than comparable-term Treasury securities," the authors write. That means commercial mortgages pay interest rates 3 percentage points higher than government bonds -- given the recent jump in long bond rates, about 10 percent.

In Maryland, USF&G Corp. reports that it has no commercial mortgages delinquent. USF&G spent the 1980s as an equity player in real estate, and didn't begin making mortgage loans until about 18 months ago, when the real estate bust created opportunities for bottom-fishing and falling interest rates put financially sound developers in the market for refinancings.

"We were able to get good lending opportunities with very conservative underwriting," USF&G's vice president for real estate, Charlie Werhane, said, thanks in part to the fact that other insurers rocked by loan losses weren't in a position to compete for the business.

Ocean outlet planned

Baltimore developer David Cordish is moving into Ocean City with an announcement that he plans to build an outlet shopping center along U.S. 50, the main access road into the resort town.

The 160,000-square-foot center is set to open next spring and will be aimed at an upscale market, Cordish Co. marketing director Susan Gerken said.

Tenants will include Champion, Alexander Julian, Bass, Van Heusen, and a total of about 40 stores overall, she said. Construction will begin in the fall.

"Our site is right off the beach, so it's inevitable tourists will stop, before, during and after their stay," Mr. Cordish said.

The right to develop the project was acquired last month from a joint venture between Mr. Cordish and Baltimore developer Erwin Greenberg.

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