Commercial real estate recovery seen
CRYSTAL LAKE – McHenry County's commercial real estate market remains in a slump, but local experts see signs of recovery on the horizon.
A glut of supply combined with continuing foreclosures have depressed prices, but rental and leasing activity has picked up as the broader economy grows.
Commercial real estate prices have fallen by at least 30 percent since the recession. In some places, space is going for about $5 per square foot compared to pre-recession prices of between $8 and $10 per square foot, said Mike Deacon, of RVG Commercial Realty in Crystal Lake.
Prices have started to stabilize more recently, several local real estate agents said.
"We feel like we may have bottomed out," said Bruce Kaplan, senior broker associate with Premier Commercial Realty in Lake in the Hills. "This may be the beginning stages of recovery, but we've still got a long way to go."
Stabilization is welcome after a spate of high-profile commercial foreclosures.
For years, the county's most visible sign of the troubled real estate market was the unfinished Riverside Square building. Dubbed the “Tyvek Tower,” it loomed over downtown Algonquin at the corner of routes 31 and 62.
The developer that broke ground on the luxury condominium project filed for bankruptcy in 2008 shortly after construction began. That kicked off two years of court battles between the village of Algonquin and banks over fixing what village officials called a blight and a safety hazard.
Last summer, after it was purchased by a new owner, workers transformed the once Tyvek-covered structure with leaky roofs and mold issues into a watertight building with a brick facade.
But four years later, the building remains empty. The owner is now planning to fill it with smaller apartments rather than condos as the market for the latter has dried up.
Foreclosures have dotted all sectors of county's commercial landscape. A foreclosure notice was filed against the company behind the 644-home Tall Grass subdivision planned for Prairie Grove in 2008. In late 2009, the private Turnberry Country Club in Lakewood went into foreclosure. And Harris Bank filed a mortgage foreclosure on Galt Airport in Greenwood in 2010.
Though commercial foreclosures aren't likely to stop, defaults appear to be slowing.
Nationally, the delinquency rate for commercial real estate loans recently fell to a 14-quarter low of 5.3 percent. That's less than half of the 10.8 percent delinquency rate in the first quarter of 2010, according to an August report from SNL Financial.
"From what I've seen, banks are doing everything they can to avoid getting a property back [through foreclosure], but there comes a point where they have no choice," said Jack Minero, of Prudential First Realty in Crystal Lake.
Deacon put it this way: "The earthquake is over; what we're feeling now are aftershocks."
Bank-owned properties sometimes sell for a fraction of what they were worth at the peak of the commercial market, Minero said.
But that goes for other properties, as well.
Last year, a company called 5200 Properties LLC bought the decaying former automotive center at 5213 Route 14 in Crystal Lake for $2.5 million. In 2005, the same 5.8-acre property sold for $7.2 million – nearly three times as much, according to state and township records.
For the first time in at least a decade, the total assessed value of all of the commercial property in the county dropped in 2011, according to records from the McHenry County Assessor's Office. The assessed value dipped about 3.2 percent in 2011 to $1.17 billion from $1.21 billion. The county assesses property at one-third of its actual value.
Commercial rental rates have dropped 30 to 40 percent in some places, Kaplan said.
An over abundance of space is largely to blame.
As companies have downsized or closed, they have shed office and retail space. New businesses have taken up some of that supply, but Kaplan said most commercial tenets are looking for less than 2,000 square-feet.
Some larger, single-store retail spaces remain empty. The Crystal Court shopping center along Route 14 in Crystal Lake is one example.
In addition, many new businesses are renting or leasing rather than buying.
"They go with a lease with an option to purchase to minimize their risk," Minero said.
Because banks have ratcheted up lending requirements, commercial property owners looking to sell are increasingly willing to finance the purchase themselves. Minero said he encourages clients who are able to offer owner-financing, which typically requires a larger down payment and sets a deadline for the buyer to secure a bank loan or return the property.
While an oversupply of inventory and pressure from foreclosures are the primary drivers in the commercial market, a growing property tax burden hasn't helped, Minero said.
"Taxes are killing some deals," he said. "And for owners, taxes are really putting a strain on their profit margin. Quite a few businesses out there are hanging on by a thread."
Minero recommends commercial property owners who haven't already challenged their property tax assessments do so. In many cases, this can significantly reduce the owner's tax liability.
There has been some good news in the commercial market.
"We're seeing more activity," Kaplan said.
Several other brokers also reported an uptick in interest. Some local municipal officials, who play a role in attracting retail tenets, have noticed this trend as well.
Algonquin Community Development Director Russ Farnum said "retailers are pulling their heads out of the sand again and beginning to look around to see what's out there."
2011* Principal Property Taxpayers (percentage of total assessed value)
1. Wal-Mart Stores Inc: $20,737,656 (0.20)
2. Nimed Corp.**: $17,883,634 (0.18)
3. Inland Real Estate Corp.: $10,819,885 (0.11)
4. Sky Ridge Partners LP: $9,818,982 (0.10)
5. Rubloff: $9,739,786 (0.10)
6. DDR McHenry SQ: $9,662,342 (0.10)
7. Centro Bradley: $9,623,642 (0.09)
8. Menard Inc.: $8,876,100 (0.09)
9. Target Corp.: $8,177,498 (0.08)
10. Meijer Stores: $7,484,992 (0.07)
Total: $112,824,517 (1.12 percent)
2002* Principal Property Taxpayers (percentage of total assessed value)
1. Motorola: $20,997,900 (0.34)
2. Bradley Real Estate: $8,450,570 (0.14)
3. Freed Joseph J/Assoc Inc.: $7,228,905 (0.12)
4. Wal-Mart Stores Inc.: $7,016,912 (0.11)
5. Terra Cotta Realty Co.: $6,271,968 (0.10)
6. Cunat Bros. Inc.: $5,424,887 (0.09)
7. Fountains: $5,220,465 (0.08)
8. Follet: $5,191,995 (0.08)
9. Target Corp.: $4,919,003 (0.08)
10. Home Depot USA Inc.: $4,716,498 (0.08)
Total: $75,439,103 (1.22 percent)
Source: McHenry County Assessor's Office
*Year taxes payable
**Nimed is a real estate holding company for Centegra Health System