BMO Harris taps new real estate lending chief

John Petrovski once heated up fuel oil to 950 degrees as a researcher in the energy industry. Now he's keeping an eye on the temperature of commercial real estate markets.

Mr. Petrovski, 58, recently was promoted to managing director and head of commercial real estate lending in the U.S. for Chicago-based BMO Harris Bank N.A. He moved into the role from the bank's chief operating officer position for commercial real estate.

In his new role, Mr. Petrovski oversees a team of 120 people and is aiming to boost new loan origination by 20 percent over the next year at the bank, a unit of Toronto-based BMO Financial Group. The bank’s commercial real estate portfolio in the U.S. was approximately $6.3 billion in the first quarter, according to a bank spokesman.

BMO has been an active financier during the local real estate recovery. It served as a lead lender for the New City apartment-retail development on the North Side and joined other banks in financing construction of the Maxwell, a South Loop shopping center, and redevelopment of the Lakeshore Athletic Club into luxury apartments.

Now, Mr. Petrovski must compete to find deals during what he calls the “middle innings” of the real estate cycle in the Chicago area and other markets where BMO is active.

“Generally, coming out of the downturn, there's pent-up demand for prudent new supply — pre-leased office, pre-leased retail, some new apartments,” he said. “So I'd like to continue to do more of that.”

Retail and office projects are likely just in the fourth inning of the cycle, he added, using the baseball metaphor, but apartments are further along, in the fifth or sixth.

“We're probably going to do a bit more slower volume of new apartments as we kind of digest the ones we've done and be a little bit more selective going forward,” Mr. Petrovski said.

A Chicago native, Mr. Petrovski has a bachelor's of science degree in chemical engineering from the University of Illinois at Urbana-Champaign. After college, he spent two years as researcher for Amoco Oil Research in Naperville before going back to school to study law at the University of Michigan, earning a degree from the school.

Mr. Petrovski then returned to Chicago, where he worked for the predecessor firm of what's now Katten Muchin Rosenman LLP. He later took legal and executive roles with lender Heller Financial during a 14-year stint with the firm, and served as a group president at Merrill Lynch Capital in Chicago for six years, overseeing $5 billion in commercial real estate loans and 80 employees.

He then worked as president of Picerne Capital and spent two years at the Federal Deposit Insurance Corp., focusing on bank loss-share monitoring and other projects. In April 2012, he joined BMO Harris as its chief operating officer. Mr. Petrovski takes over his new position from Dan Hampton, who is now based in Indianapolis as managing director for commercial real estate sales.

In a recent interview, Mr. Petrovski discussed real estate lending in the current market. Here are excerpts from that discussion:

Crain's: You have lent into the apartment market downtown — I'm thinking of the Lakeshore Athletic Club loan, for example. Are you worried about an oversupply or even a glut in the Chicago market?

Mr. Petrovski: Worried would be strong, but I would say we're mindful of it. So we watch new supply rigorously and we watch supply/demand and lease-up, and watch for concessions to creep in. But overall I would say that the country has good demand for new apartment supply. There is the demand. The local question is: Is there too much high-end coming on all at once? And we think that could happen, but generally I think you'll see concessions creep in, you'll see the pipeline get pinched down.

How does Chicago's commercial real estate market compare to other cities where BMO Harris is lending and doing real estate deals?
We look at market size and demographics and growth all the time. We look at supply and demand all the time. The good news about some of the smaller secondary markets is they're not being overbuilt. On the other hand, they don't have the growth that would kind of absorb new product as it comes on. Chicago is a large market, and it's got a wealthier population than a lot of cities. So there is the demand for high-end rental, for high-end shopping. There is demand for new office space and tenants that want to rent in new office buildings.

Are you seeing lending requirements loosen up as the market improves vs., say, two or three years ago?
We've seen a significant change in the capital markets approach to real estate in the last three years. Whereas three years ago there wasn't as much activity and lending volumes were still low, today, lending volumes and transaction values and transaction activity is back to '05-'06 values. We're not yet back at the '07 frothiness but we're at a healthy volume. We see a healthy amount of competition from other lenders and sometimes that encourages us to increase our advance rates or compete more on spread.

After a long career in the private sector, you spent almost two years working for the FDIC right after the biggest real estate downturn in decades. What did you take away from that experience with regard to real estate lending?
I've been on both sides now, in the bank and in the government, and I'd say what's come out of my experience is a renewed appreciation for what I call loan structure. And by loan structure what I mean is, (Do) you have an appropriate amount of equity in the deal? Do you have loan covenants, that if the property performance starts slide sideways can you trap cash to protect the property? I think appropriate advance rate, appropriate structure and appropriate monitoring are all things the FDIC wants to see. Likewise it's what the bank wants to see.

Triangle's commercial real estate industry riding five-year highs

North Carolina - The Triangle commercial real estate market finished out the first quarter 2014 in a much better position than it’s seen in the last five years, according to results from the first quarter 2014 SPACE survey report that will publish May 2 in Triangle Business Journal.

Overall vacancy for office buildings in Wake, Durham and Orange counties fell to 15.7 percent overall in the first quarter, the market’s lowest vacancy rate since late 2008, and down from 16.2 percent in the fourth quarter 2013.

The more highly coveted Class A office buildings dropped to a 10.3 percent vacancy rate from a rate of 11.9 percent in the fourth quarter.

The highlight of the quarter was theLenovo technology company’s negotiated deal in March to lease both of the vacated Ericsson buildings on Development Drive in Research Triangle Park, effectively erasing 455,000 square feet of vacant office space in the region.

It’s the first time since the late 1990s that the RTP submarket has had a Class A vacancy rate in the single digits with a rate under 8 percent, says Ed Pulliam of CBRE-Raleigh and a member of the SPACE committee.

“These are really telling numbers for our office market,” he says.

However, the expiration of FHI’s 147,000-square-foot lease at Headquarters Park in Durham, after FHI relocated to a new building in downtown Durham, leveled the absorption numbers a bit in the first quarter.

Strong activity in the Triangle office market trickled into the flex, warehouse and retail leasing markets, which also posted positive data trends in the first quarter.

Las Vegas commercial real estate sectors looking up

LAS VEGAS, NV -  An improving economy boosted Southern Nevada’s commercial real estate markets in the first quarter.

A new report from commercial brokerage Avison Young shows improvements in the industrial, office and retail sectors, and gives a few key trends to look for.

Start with industrial vacancies, which fell to 11.1 percent in the first quarter, down from 12 percent in the same quarter a year earlier. North Las Vegas was especially hot: The submarket posted the most industrial sales and the third-largest number of leases in the past year. That could push up rents and spark new speculative building in the area.

Expect lease rates to slowly rise marketwide through 2014 as leasing activity picks up, and look for a lack of available land to push developers outside of the metropolitan area.

On the office side, vacancies ticked up from 19.5 percent to 20 percent year over year in the first quarter. The biggest jump came in the southwest, where more than 150,000 square feet — most of it in chunks of less than 10,000 square feet — came on the market.

Expect office vacancies to decline and lease rates to rise as the local economy continues to improve in 2014, the study said.

Little changed in retail vacancy, which has hovered around 10 percent since the fourth quarter of 2012. In this subsector, job growth is vital, because consumer spending dictates development. And job growth is a positive story, with Nevada’s creation rate ranking in the nation’s top two in January, February and March.

Improving demand for space means rents have stabilized, and landlords are getting choosier. Occupancy in highly visible, well-anchored shopping centers is rising quickly.

The big story in retail is the ongoing construction of 2.5 million square feet of space marketwide, most of it in the 1.6 million-square-foot Shops at Summerlin on the west side. But developers are in the market for still more land — a search that’s ever tougher with homebuilders buying land and banking it for future development to avoid higher prices later.

Also, the report noted a “significant increase” in inquiries from tenants who want to open medical marijuana dispensaries, which became legal in Nevada on April 1, and vapor shops, where consumers can buy e-cigarettes and other products designed to wean them off of cigarettes.

■ Commercial Alliance Las Vegas, the commercial real estate arm of the Greater Las Vegas Association of Realtors, will host its annual spring networking mixer May 8.

The event is scheduled from 5:30 p.m. to 7:30 p.m. at Cili inside the Bali Hai Golf Club.

Admission is $20 for members of the Realtors’ association, as well as members of sponsors and partners including the Society of Industrial and Office Realtors, the Institute of Real Estate Management, Commercial Real Estate Women, Certified Commercial Investment Member and Commercial Marketing Group. It’s $35 for nonmembers.

Alliance President Hayim Mizrachi said the mixer is one of the group’s best-attended events, and “is a great way for Commercial Alliance Las Vegas to meet its mission of uniting the commercial real estate industry in Southern Nevada.”

■ The Southern Nevada Home Builders Association is on a mission to persuade real estate sales agents to buy new.

The trade group, in partnership with Alpine Mortgage Planning and the Greater Las Vegas Association of Realtors, has launched its “New Home Training and Tour Series.”

Instructors will talk over continental breakfast about selling new homes, builder terminology and new master plans and subdivisions. After class, students will take a bus tour with a box lunch.

The first classes are scheduled for May 14 and May 21 inside Alpine’s offices at 8363 W. Sunset Road. The program will run from 8:30 a.m. to 2 p.m.

Nat Hodgson, executive director of the builders’ association, said Realtors are involved in almost nine out of 10 home purchases, and the program “is going to raise the bar for new-home sales education.”

■ Brokers with Colliers International closed on two big, recent sales.

Grant Traub and Chris Connell represented West Flamingo Road LLC in its $4.2 million sale of an 80,000-square-foot retail and self-storage building at 9227 W. Flamingo Road. Ryan Howse of Preston Matthews Real Estate Services represented the buyer.

Also, Scott Gragson and Robert Torres represented GKT Acquisitions in its $2.5 million purchase of 35 vacant acres at the southwest corner of Larson Lane and Rancho Destino Road.

■ Brokers in the Las Vegas office of Sun Commercial Real Estate helped complete two major leases.

Cathy Jones, Paul Miachika, Jessica Beall, Roy Fritz and Cash Jordan represented tenant Good Night Pediatrics in its 88-month lease for 4,446 square feet of space at 861 N. Higley Road in Gilbert, Ariz. The deal was valued at more than $606,000. Whitestone REIT is the landlord.

And Edward Bassford represented the Nevada System of Higher Education on behalf of the College of Southern Nevada in its 36-month lease of 26,165 square feet of industrial space at 2925 Lincoln Road. The landlord in the $276,826 deal is CW &AC Enterprises Ltd.

■ Local residential real estate veteran Donna Ruthe has taken the helm of a local nonprofit’s board of directors.

Ruthe was named president of the board of the Solutions Foundation, a philanthropy that focuses on substance-abuse awareness, education and assistance.

The organization has reached more than 10,000 children through its distribution of opiate-awareness handbooks, manuals and prevention training.

Ruthe, who’s practiced in the Las Vegas real estate industry since 1981, is broker-owner of Today’s Realty.

Ruthe said in a statement that there’s “a huge need” for substance-abuse prevention programs in Southern Nevada.

“Substance abuse affects all of us, and proper education helps people make better decisions,” she said.

Ruthe has also volunteered on behalf of the Nevada Medical Examiner’s Board, Opportunity Village, Ronald McDonald House, American Diabetes Association and Candlelighters for Childhood Cancer.

CMBS Loss Severities Tick Up; Retail’s Numbers Are Worst

NEW YORK CITY—Loss severities ticked up slightly for US CMBS year-over year in 2013 while the pace of loan resolutions fell, according to Fitch Ratings in its latest annual study of CMBS loan losses. The study, released Monday, showed that retail posted the worst numbers out of the major property types.

Average loss severities rose to 51.2% in 2013 from 50.5% in 2012. “Special servicers are continuing to resolve many over-leveraged CMBS loans with most of them still coming from the peak years of 2005-2007,” says Mary MacNeill, managing director at Fitch. The ratings agency expects the pace of CMBS loan resolutions to remain constant this year, while average loss severities should remain stable compared to 2013.

Special servicers resolved 872 loans last year, totaling $16.4 billion in Fitch-rated That represented a decrease of more than 28% by number when compared to the 1,219 loans totaling $16.6 billion resolved in 2012.

The average size of resolved loans jumped to $15.3 million from $9.2 million in 2012, hence the discrepancy between the 28% Y-O-Y drop in the number of loans and the far smaller decline in dollar volume. Last year, says MacNeill, “Special servicers were able to resolve many CMBS loans that had been languishing in special servicing for several years.”

Retail had the highest average loss severity at 62.1%, representing a 14.5% increase from the ‘12 loss severity of 54.2%. Eight of the 11 largest losses in ‘13 were retail properties, and all 11 resulted in losses of more than $50 million to their respective trusts, says Fitch.

As a case in point, Fitch cites the Promenade Shops at Dos Lagos (JPMCC 2008-C2) a 351,179-square-foot anchored retail property in Corona, CA, which had the greatest dollar loss of any securitized loan last year. The $125.2-million loan was liquidated after spending almost five years in special servicing.

“At its origination, the property was newly built with limited operating history,” according to Fitch’s study. “At origination of the transaction, the occupancy was 96% and the original as-is appraisal was $163 million. Prior to liquidation, the occupancy had fallen to 72.5% and the December 2011 appraisal was $32.4 million. The property was sold in July 2013 for $30 million. After accounting for advances, appraisal subordinate entitlement reductions (ASERs), fees and other unpaid amounts totaling approximately $41 million, the liquidation resulted in a loss severity of 108.2%.”

Hotels and multifamily showed the greatest decrease in loss severities compared to the year prior. 2013 loss severities for these property types were 36.8% and 36.8%, respectively, compared to 59.8% and 42.7%, respectively, in ‘012. Both properties types have recovered well since the downturn, says Fitch.

Resolution time for disposed loans increased to 30.4 months in 2013 from 23.3 months in 2012, as special servicers resolved many loans that had been in special servicing a number of years. Fitch says it expects resolution time to shorten as the inventory of older loans in special servicing has shrunk.

Three-hundred and sixty-six loans were resolved without losses—including losses less than 1.5%--while 506 resulted in losses of greater than 1.5%. Average loss severity for loans with losses was 51.2%, contributing to the cumulative loss severity of 47.7%.

Las Vegas Real Estate in March: Year-over-year Non-contingent Inventory up 128%

This is a key distressed market to follow since Las Vegas has seen the largest price decline of any of the Case-Shiller composite 20 cities.

The Greater Las Vegas Association of Realtors reported GLVAR reports rising home prices and more homes available for sale

GLVAR said the total number of existing local homes, condominiums and townhomes sold in March was 3,094, up from 2,518 in February, but down from 3,642 one year ago.
...
GLVAR continued to track the transition from distressed to more traditional home sales, where lenders are not controlling the transaction. GLVAR has been reporting fewer short sales – which occur when lenders allow borrowers to sell a home for less than what they owe on the mortgage. In March, 12.9 percent of all existing local home sales were short sales, down from 14 percent in February. Another 11.7 percent of all March sales were bank-owned properties, down from 12 percent in February.

GLVAR said 43.1 percent of all existing local homes sold in March were purchased with cash. That’s down from 46.8 percent the previous month, and well short of the February 2013 peak of 59.5 percent.
...
The total number of single-family homes listed for sale on GLVAR’s Multiple Listing Service in March was 13,944. That’s up 2.3 percent from 13,624 listed in February and up 1.8 percent from 13,693 listed one year ago. GLVAR reported a total of 3,701 condos and townhomes listed for sale on its MLS in March, up 3.9 percent from 3,561 listed in February and up 7.2 percent from one year ago. ...

By the end of March, GLVAR reported 6,470 single-family homes listed without any sort of offer. That’s up 2.4 percent from 6,316 such homes listed in February, and a 127.9 percent jump from one year ago.
emphasis added

There are several key trends that we've been following:

1) Overall sales were down about 15% year-over-year.

2) Conventional sales were up 16% year-over-year. In March 2013, only 55.5% of all sales were conventional. This year, in March 2014, 75.4% were conventional.

3) The percent of cash sales is down year-over-year (investor buying appears to be declining).

4) and most interesting right now is that non-contingent inventory (year-over-year) is now increasing rapidly. Non-contingent inventory is up 127.9% year-over-year (more than double)!

Inventory has clearly bottomed in Las Vegas (A major theme for housing last year). And fewer distressed sales and more inventory means price increases will slow (a major theme for 2014).