More REO Properties in California's Commercial Real Estate

The trend in the commercial real estate market in California is a sign of the hard times. With the economy getting worse, rising unemployment and residential foreclosures, industry experts are not surprise to see the commercial sector joining the list of REO properties.

The recent victims to join the growing list of REO properties in the area are three landmark buildings located in the Watergate office complex in East Bay. The buildings became target of foreclosure due to their mortgage default of over $150 million.
Industry experts said that the current trend is a bleak indicator of the erosion in the commercial real estate market in the area.

The mortgage default of these office towers jeopardized the millions of equity invested by the California Public Employees’ Retirement System (CalPERS), in the property. In December 2006, the Watergate Office Towers, consisting of four buildings, were acquired by an investment group, led by realty investment company, Hines. The 1.2 million-square-foot property fetched a total selling price of $335 million. Included in the property deal is a restaurant building.

Hines and CalPERS’ joint venture project, NOP Watergate LLC defaulted on the $152 million mortgage it took out from Pacific National Bank, for three of the buildings in the Watergate. Alameda County records showed that the three buildings have a combined total of 814,000 square feet.

On a separate development, Hines lost a foreclosure proceeding for a San Francisco office building and a Marin County project.

According to industry experts, a growing number of commercial properties in East Bay including hotels, industry buildings, office buildings, mixed-used projects, land development sites and retail centers have become REO properties. Some of these properties have already been taken over by banks and lenders in foreclosure.

Meanwhile, an analysis of the county property records showed that since October 1 last year, lending institutions filed default notices on commercial properties in Easy Bay. The delinquent filings reached a total of $1 billion in loan value.

Industry experts said that partners Hines and CalPERS assumed wrongly that they could charge a rental fee of $3 per square foot on the foreclosed properties. However, in the past month, rents in the area dropped to $2.25 per square foot, an almost 25 percent decline in rental rates. Experts said that the Watergate REO properties are only 75 percent occupied.

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