City Bankruptcies Dont Mean The Sky Is Falling
SAN BERNARDINO, CA-The recent declarations of bankruptcy in California cities including Mammoth Lakes, Stockton and San Bernardino and signs of shakiness from other cities in the state beg the question: What impact will all of these bankruptcies have on commercial real estate? GlobeSt.com spoke to those directly involved with the bankruptcies and industry experts to get an idea of how these developments will affect the market as we move forward.
The general feeling among those close to the bankruptcies in San Bernardino is that there’s no reason to panic, mainly because investors and developers, including Hillwood Development Co., a major industrial developer in this market, are still showing interest in it. “Hillwood’s tenants haven’t raised any concerns to us, and we have relationships with all of them,” Mary Jane Olhasso, administrator for the County of San Bernardino Economic Development Agency, tells GlobeSt.com. “There are no protests, no public employees on the streets—everything is business as usual.”
Olhasso spoke with GlobeSt.com in April during the CoreNet Global Summit in San Diego regarding the results of a year-long research project titled Corporate Real Estate 2020, which brought together hundreds of CRE global thought leaders to analyze and parse the corporate real estate industry’s current and future state.
The County makes it clear to GlobeSt.com that the City of San Bernardino’s authorization to file Chapter 9 bankruptcy in July does not mean that the County is in trouble. The City and County are completely separate legal and fiscal entities with separately elected governing bodies, budgets and finances. Although the City serves as the County seat, the City contains only 10.3% of the countywide population. Also, in June, the County of San Bernardino adopted a balanced fiscal year 2012-13 budget, which includes limited cooperative relationships with the City with little or no fiscal impact, and the County will monitor the situation in the City for any effects related to those relationships. The County does not anticipate any material impacts to its budget as a result of the City’s action.
The biggest concern the County has had over the City’s filing has been one of branding, Olhasso tells GlobeSt.com. “The first two weeks [after the filing], we were getting emails from the East Coast: ‘Do you need a job?’ We put a little paragraph in our newsletter stating that we’re stable—we’re the County, not the City.”
Early education helped quell any doubts, she adds. “I was wondering if our leads would start to wobble, shaking the business attraction side of the house. But there has been a good, strong uptick of activity in big-box industrial and entrepreneurs looking to expand here. They’re watching leads carefully, touching base, and they really don’t bat an eyelash. They’re not going anywhere, and they’re still pursuing real estate options.
San Bernardino’s ties to the ports of Los Angeles and Long Beach also help keep it stable, says Olhasso, “The bankruptcies are very unfortunate—the property- and sales-tax revenues downdrop is the perfect storm for San Bernardino—but the fundamentals are so solid here.”
Also, San Bernardino is home to many Fortune 500 facilities whose headquarters are elsewhere, which makes the local employees somewhat indifferent to the City’s fiscal issues. And, Olhasso says that housing prices in the county are stable now, and that healthcare will continue to create huge real estate demand due to the sheer population numbers here.
Another fact those in San Bernardino point out is that a Chapter 9 reorganization is not the same as a Chapter 11 filing. “There are some concerns about what this really means for the city and services,” Jim Morris, chief of staff to San Bernardino Mayor Pat Morris, tells GlobeSt.com. “I think the commercial markets and those investors understand that bankruptcies can be quite healthy—you can come out of it with a better place to do business. Really, that’s what Chapter 9 bankruptcy is all about.”
Morris reiterates what Olhasso says about Hillwood and its chairman Ross Perot, Jr., continuing their commitment to the city by developing a 1-million-square-foot, multi-hundred-million-dollar Amazon e-commerce center here in addition to owning another nearly 2 million square feet that the firm intends to break ground on shortly in the same area with blue-chip companies interested in the space. Hillwood has also engaged in another 900,000 square feet in the north end of the city, Morris adds.
“That’s just one company that is deeply invested here,” he says. “Looking at what the market offers in light industrial, the commercial real estate industry continues to be very strong in San Bernardino.”
Still, Morris points out, there’s not a complete disconnect between the bankruptcies and the CRE industry. “The commercial real estate market is not completely indifferent to those issues. You still need core municipal services: police, fire protection, good streets and roads, an education base for its workers—all of those things go into making up a place that sustains a long-term investment. Investors or developers in commercial space want to know that through thick and thin, those foundations upon which those investments are made remain stable and that there aren’t unwanted risks in that foundation.”
It’s the City of San Bernardino’s job to diligently and efficiently work through the bankruptcy so that it makes the city stronger and a better place to do business, Morris admits. “What the bankruptcy filing indicates is that we are imbalanced at this point to deliver those core services with the means we have. It means we have to restructure those costs.”
While Mammoth Lakes is a different case altogether, Stockton and other cities facing fiscal difficulties are mostly older cities, Morris adds. For those regions, the dissolution of the redevelopment agencies is more of an issue, as GlobeSt.com recently reported, since there are many properties whose fate still awaits the development of a “property-management plan” that the state must approve before buildings can be sold and/or rehabilitated.
Olhasso agrees that the bankruptcies will force elected officials to deal with pension reform and managing reserves. “You have to be proactive about how you manage fiscally and what expectations you set for residents. If you’re a wise—or lucky—investor, you’re going to be able to manage through these times. It’s a day of reckoning.”
Pat Wakeman, a principal with CALCAP Advisors in San Diego, is more concerned about the big picture of all the bankruptcy filings. “It’s not like changes are being made right now that are difficult but we’re going through them—decisions are being prolonged and nothing is changing. On the business-related side, valuations in leased properties may not have changed significantly, but counties in California garner a lot of their revenues from property taxes. As real estate investors, we want to go into a community, buy a property and improve it. But if a community is struggling to provide basic services, then investors are going to be inclined to go to other communities.”
Wakeman adds that he’s encouraged that cities like San Bernardino are optimistic about restructuring. “Embrace it and make some decisions and get something done,” he urges. “We can’t kick the can down the road indefinitely. Let’s start to address some of these issues and make our communities better.”
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