Improving Economy Helps NoCo Banks Unload 'Toxic' Properties
The improving real estate market is helping banks get problem loans off their books.
Portfolios of distressed, bank-owned properties ballooned during the economic downturn – leaping from $22 million in 2009 to $79 million by 2011.
Distressed properties often are called ''toxic'' because they are a drag on performance. But if banks can sell the properties in a recovering market, then earnings improve and banks don’t have to set aside as much capital to offset those losses.
Now banks are starting to unload much of those properties, thanks to the current upswing in real estate values, especially in residential development. The amount has dropped to $65 million since 2012 – a 17 percent decrease, according to Northern Colorado Business Report publisher Jeff Nuttall.
"The trend continued this year," Nuttall adds. "As of June 30, those portfolios had shrunk to $49 million, a reduction of 37 percent from the peak in 2011. Bankers are able to sell distressed properties because the economy has improved and buyers are showing up at sales."
One- to four-family residential lots were among the most common properties banks took back, but they’ve now become desirable assets. Over the past year, Nuttall says lot values have doubled because of renewed interest in home buying and plummeting rental vacancy rates across Northern Colorado.
What do these price increases look like?
"In recent months, a developed single-family lot could be acquired for $30,000 to $40,000. Once the available supply runs out, however, that price could go up by as much as 50 percent to $60,000, according to local real estate experts."
Which kinds of property are still hard to sell?
"Raw land remains one of the hardest assets to unload, even in the 2013 economy. Installing water and infrastructure is expensive, and then deters many from purchasing this kind of land. It’s beginning to change though. In some areas, such as north Fort Collins, demand for developed is growing fast.
The only asset more difficult to sell than raw land is a partially completed building. Rather than simply sitting and holding value, as land does, partial buildings lose value through deterioration and vandalism, and buyers are often reluctant to take these on."
What about other sectors of commercial real estate?
"Well, retail values tend to be tied to residential prices, so similar market factors - such as employment and income levels - affect these prices. As people find jobs or get raises and get more disposable income, they spend money at retail establishments and consider buying or upgrading their homes.
Industrial prices have also been on the rise for months, led by the oil and gas industry in Weld County, which has taken up most existing industrial space larger than 50,000 square feet. The last commercial category to come back is office space, but as businesses begin to grow and hire again, they also will need more and larger spaces to put their employees."