Thomas K. Shelton Diagnoses The Debt Crisis

PERSON OF THE WEEK: According to Thomas K. Shelton, president of Western National Property Management, the problems in commercial real estate (CRE) finance today are primarily debt-related, not necessarily CRE-related. Shelton, whose Irvine, Calif.-based firm manages over 22,000 multifamily units in over 145 apartment communities in Arizona and California, also spoke with MortgageOrb about fundamentals in the multifamily sector and prospects for recovery this year.

Q: Where are multifamily market fundamentals (vacancy rates, supply-demand, etc.) right now? How much region-to-region variance is there?

Thomas K. Shelton: Market fundamentals vary from sub-market to sub-market and city to city. For instance, Southern California has fared well compared to overbuilt markets like Phoenix, Atlanta, South Florida and Houston.

Overall, with little supply being added, the current demand has not created sufficient absorption numbers to drive down vacancy and add any upward pressure on rents.

Q: Some recent reports are suggesting that the apartment sector and commercial property types may have bottomed out and are starting to head toward recovery. What do you foresee?

Shelton: It is difficult to judge whether or not we have hit the bottom of the cycle. We are seeing a very slight improvement in some markets, but nothing significant.

Job-growth projections for 2010 are still negative for most major metropolitan statistical areas, and until that changes, it is difficult to point to any sign of imminent recovery.

Q: In your dealings with distressed properties, is there a common thread in the causes of distress? How many distress situations consist of performing loans that are simply unable to refinance in the current market?

Shelton: The common thread among today's distressed real estate properties is a classic combination of assets being over-leveraged and the significant deterioration of market fundamentals.

Debt is available for both new acquisitions and refinances through the major government-sponsored enterprises, but underwriting is much more stringent. Borrowers should expect to see loan-to-value ratios around 60%.

Without considerable equity and a proven track record of performance, affordable debt is difficult to come by.

Q: How much of a threat do you think the continued weakness in the commercial real estate sector as a whole poses to the economic recovery in the U.S.? Many policy-makers have expressed deep concern.

Shelton: To the extent that commercial real estate development has historically created hundreds of thousands of jobs, a prolonged extension of the current cycle will no doubt continue to impact the overall economy.

Q: For multifamily investors, where are the current opportunities? Have distress situations created as wide a window of opportunity as earlier predictions indicated?

Shelton: We have yet to see significant opportunities being created in the real estate sector, other than for service providers such as property managers, asset managers, appraisers and loan servicers.

The most accurate description of our current situation that I have heard recently is this: ‘There is not an overall real estate crisis as much as there is a debt crisis.’


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