Quotes: Dawn of the Shadow Inventory!

× Like us and you'll find top breaking news in your Facebook newsfeed. Sign up for our daily email newsletter and get top stories and breaking news delivered to your inbox. Tuesday, September 20, 2011, by Anna Marie

It’s not a B-reel Harry Potter movie, folks; it’s a phenomenon by which the number of Notices of Default filed in August in the U.S. has spiked dramatically-- an overall increase of 116% --to the highest level in a year. An August 2011 ForeclosureRadar report shows that the Notices of Default (NOD) or Notices of Trustee Sale(TS) rose in nearly every state, with California’s NODs jumping 69.5% and TSs jumping 6.06% over the previous month. Alameda County Realtor Pacita Dimacali localizes the issue: “In my neck of the woods, the jump is even more dramatic”: NODs in Alameda County climbed to 71.97% over the previous month, while TS numbers grew 7.78% .“Just as we were seeing a slowing down of NODs and TSs, we are now rudely awakened by the drastic upward spike. We can assume that many loans are re-setting, and the property owners are unable to meet the higher mortgage payments. But [so many] in one month?”
· Dawn of the shadow inventory: a significant upswing in Notices of Default filed in California [Active Rain]
· ForeclosureRadar [website]

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Beware the Shadow Office Space

Last summer I did some reporting on shadow office space, which is leased space, like individual offices, cubicles or entire floors, that was vacated during the recession. This shadow space was adding as much as 7 percent to office vacancy rates in Los Angeles and over 6 percent in Chicago, according to CoStar Group.

Now that the office market appears to be taking a turn for the better, that shadow space will start to fill up, and in most places it will have to fill well before the company looks to take on additional space. Today Grubb & Ellis, a commercial real estate services and investment company, put some numbers to the scenario.

"Grubb & Ellis expects that shadow space vacated during the recession will accommodate about one-third of all net new demand in 2011 and about one-fourth in 2012; this activity will not be reflected in the published statistics," writes Bob Bach, chief economist, in his "U.S. Office Market First Look: 2010-Q4"

Bach goes on to say that the "still-tepid rate of hiring," combined with this shadow space, will keep the office market "struggling to keep up with prior recovery cycles."

Office buildings gained 2.5 million square feet of occupied space in Q4 of 2010, the first increase since the end of 2007, according to Reis, Inc., a commercial real estate analysis firm, but the 17.6 percent vacancy rate still represents a 17-year high.

That doesn't seem overly concerning to investors in the office market. Pricewaterhouse Coopers surveyed 200 real estate executives, including investors, lenders and brokers, and found more than 70 percent believe the commercial real estate recovery is real. 32 percent say they are looking to invest in the office sector this year, second only to 45 percent who say they would opt for the apartment sector.

Yes, 28 percent of office property mortgage loans will mature in 4Q '11, or about $6.8 billion, according to Fitch, in a still healing liquidity situation. But Fitch also reports that the pace of commercial loan modifications is quickening.

"Loan modifications continue to dominate as a resolution method," writes Managing Director Stephanie Petosa. "Servicers will resolve loans with increase velocity as liquidity returns to the CMBS market."

As more jobs are created and fewer are lost, the office sector is heading toward recovery. Investors should be careful, however, to take shadow space into account when looking at specific properties and consider distressed properties, as office loan default rates remain high.

Questions?  Comments?  document.write("");document.write("RealtyCheck"+"@"+"cnbc.com");document.write('');And follow me on Twitter @Diana_Olick

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