REO market forms major opportunity for brokers expert in new client agenda.

For the commercial real estate brokerage community in Los Angeles, the last few years have been anything but business as usual.

Heated competition, exacerbated by excessive inventory and a dearth of buyers and tenants has put more pressure on individual brokers to bring transactions to fruition.

Accordingly, successful brokers today are those who have adjusted to a whole set of new circumstances. This includes the necessity to demonstrate a capacity to provide reluctant owners expertise beyond one's traditional developer marketing approach.

It also includes possessing the resourcefulness to understand and respond to the needs of the major new owners of property in today's real estate market, i.e. insurance companies and banks. These owners are far different from developers and entrepreneurial owners who constituted the bulk of the traditional client market, but who no longer enjoy that status.

Filling a major portion of that void today in the wake of record foreclosures and bankruptcies impacting the commercial manufacturer real estate industry are the institutions who comprise the huge REO (Real Estate Owned) market, referring to properties that have been taken back by mortgage lenders.

The disposition of massive amounts of property by these reluctant owners has had a dramatic impact on the sales market. Not only have these properties served to maintain downward pressure on office building sale prices in particular, but they have imposed a whole set of conditions which brokers must be in tune with in order to successfully serve these institutional clients.

Two veteran Los Angeles County area brokers who have been notably adept at responding to the needs of the new institutional players in today's market are Craig Meyer, vice-president and manager of The Seeley Company's West Side office, and Kevin Shannon, a partner in the Seeley firm's Torrance office.

Operating as what they term "a synergistic-team, Meyer and Shannon have become expert at building dispositions for the institutional REO and related markets. For the first 10 months of 1993 alone, Meyer and Shannon sold over one million square-feet of office space representing seven different buildings in markets stretching from Long Beach to Marina del Rey. Many of these projects were REOs and/or RTC deals. The pair currently have six other similar buildings in escrow for another 300,000 square-feet.

"A key to the REO market is to understand and have the capacity to develop a discounted cash flow analysis, whereby the broker does a thorough analysis of income and expenses by using realistic market rental assumptions and leasing velocities," said Shannon. "The days of using a simple capitalization rate are over," he added.

Moreover, the REO market presents a host of different market realities that brokers need to be in tune with and which depart from traditional thinking.

"The typical REO deal does not want to be on the market for over six months. These clients want their properties off their books for a variety of financial reporting reasons. Accordingly, they are pricing office properties to sell in a short time frame."

Shannon adds that this REO marketing approach is referred to as "retail REO," or pricing property at the highest level at which a retail investor off the street would buy. This contrasts to packaging properties at wholesale prices for some undisclosed investor, Shannon explained.

In order to bring REO properties to market in the shortest possible time, typically 30 days or less, Meyer and Shannon underscore the importance of utilizing only recent sales "comps." "Comps should never be over 12 months old because the market has been changing so rapidly," said Meyer.

Other factors that need to be understood about the REO market, the Seeley brokers stated, include investment capital's purchase criteria, leveraged and all-cash product pricing, and how to ultimately put an office building on a stabilized income stream. They emphasized that brokers need to create some type of "story to tell" regardless of the sales product's condition.

"You have to recognize that today's institutional owner/seller places a far greater emphasis on what an office building's true yield is to determine its ultimate value," said Meyer.

In this regard, the brokerage community needs to be aware that many REO clients will also require you to carry out a leasing program while you are attempting to sell the property.

"This means that brokers have to understand both the buyer and tenant markets. Right pricing, or real pricing from the REO client's perspective, is key in today's market, coupled with a current understanding of lease rates and operating expenses. The REO client must have immediate trust in a broker's accuracy when you price their properties," Shannon stated.

Having outlined these parameters, Meyer and Shannon said the average "shelf time" for an REO office property today should be five to six months.

Another peculiarity of the institutional client office market, the Seeley officials continued, is the requirement for more property documentation and reporting, educating the appraisers, plus the absence of provisions for representation and warranties. They said property appraisals typically lag six to 12 months behind current market conditions because of the volatility of today's marketplace.

"In other words, buyers typically must purchase these properties as is. Historically, sellers would be required to provide certain warranties," said Shannon.

In short, the REO properties provide a substantial new market for the commercial brokerage community, but not without adherence by individual brokers to ground rules and requirements that are unique to these predominantly financially-driven institutional owners.

Art Ansoorian is a principal with Ansoorian and Associates in Van Nuys.