PhillyDeals: Bringing down the cost of tearing down

It has gotten cheaper to knock down abandoned rowhouses in Philadelphia. Thank hard times and changes in the way the city hires wreckers.

A typical knockdown deal used to take three months and three contracts: one for demolition, one for slapping stucco on walls of adjacent houses, and one for fixing the adjoining roofs.

The average cost each year from 2006 to '09, was $24,000 per house, according to city Licensing and Inspections data.

But under new L&I bidding procedures, it now takes one month and a single contract, and it costs an average of $13,000 to knock down an abandoned Philadelphia house, according to Frances Burns, L&I chief in Mayor Nutter's administration.

Besides the all-in-one contract and shorter schedules, Burns said the city had made it tougher

to change contract terms once a job has started.

Why wasn't this done years ago? Neither Burns, who served as an L&I finance executive under former Mayor John F. Street, nor Scott Mulderig, chief of L&I's Emergency Services and Abatement Unit, could say. "They've done it the other way forever," Mulderig told me.

Lower demo costs are good for taxpayers and good for the shrunken city budget. Maybe not so good for contractors like William Pecarsky. "It's a squeeze," he told me Friday, above the rumble of a front-end loader digging out the first of four rowhouses he's tumbling in the 1700 block of North 21st Street, west of Temple University.

"But it's a better system," he added. Pecarsky says his insurers are happy because he's less likely to face lawsuits alleging damage to neighboring properties that used to hang open for weeks after his demolition crews finished, waiting for other contractors to arrive.

The city typically pays the cost of knocking down abandoned houses and slaps owners with liens to recover the costs if the properties are sold.

If the city budgets its usual $8 million to $10 million for demolitions this year, and if prices hold, crews will be able to knock down more than 600 abandoned houses this year, up from 400 or fewer in each of the last four years.

Haven't lower payments driven contractors away? Not in today's weak market, Mulderig said. "We had 13 registered demolition contractors before, and we still have the same 13."

Morningstar Inc., of Chicago, said Friday that it had agreed to pay $52 million in cash and stock for Realpoint L.L.C., of Horsham, the commercial real estate loan-review agency started by Robert Dobilas and his colleagues and spun off by ailing GMAC L.L.C. in 2007.

Griffin Financial Group L.L.C., of King of Prussia, represented Realpoint in the sale, said Griffin managing director John A. Lee. Dobilas and more than 40 staffers will keep their jobs.

Pension funds, mutual funds, hedge funds, and other investors paid Realpoint $12 million last year for its tire-kicking knowledge of 60,000 office, factory, hotel, and apartment loans that have been sold as mortgage-backed securities, worth $742 billion on paper and falling each week in the real world.

Falling how fast? I asked Frank Innaurato, managing director of analytics at Realpoint. "Things are going to get worse before they get better," he told me.

In early 2008, less than 1 percent of the loans Realpoint follows were getting paid late. Delinquency rose to 1.5 percent in early 2009. Innaurato now expects it to hit "between 6 and 7 percent," or higher, by July 1, and possibly "10 to 12 percent," or $105 billion, by year's end.

"Commercial real estate is really dependent on increased demand; we're not going to see that [recover] until employment gets better, his colleague Ken Chang told me. When jobs climb back, apartment values will recover first, then hotels. "But office properties will keep getting worse," Chang said. "A lot of companies don't need the space they have."

Banks are just starting to return to the commercial-property finance market, Chang concluded.

The market peaked in 2007, with $200 billion of commercial mortgage bonds sold, before crashing to nearly nothing. "In five years, we could be back to $50 billion a month, which is where the market was in the early 2000s, before the craziness," Chang said.