Commercial Real Estate Starts to Crack

If you thought the home mortgage fiasco was bad, just wait for it. The commercial property market collapse will impact consumer spending, community tax bases nationwide and, most importantly, banks.

The first domino just tipped:

www.google.com...

General Growth Properties Inc., the nation's second-largest mall operator, filed for Chapter 11 bankruptcy protection early Thursday after it failed to persuade a majority of its debt holders to give it more time to refinance billions of dollars in debt racked up during the housing boom.

The news sent the real estate investment trust's stock down 60 cents, or 57 percent, to 45 cents in electronic premarket trading. Its stock traded last spring as high as $44.23.

The move by the Chicago-based company had been widely anticipated since the fall, when the company warned it might have to seek bankruptcy protection if it didn't get lenders to rework its debt terms. Efforts to negotiate with its unsecured and secured creditors ultimately fell short late last month.

The scary implication:

Commercial Real Estate Collapse Picking Up Steam

Even if banks were being completely honest about their marks -- which we know they're not -- the accelerating collapse of the commercial real estate market would mean billions more in writedowns.

WSJ: The delinquency rate on about $700 billion in securitized loans backed by office buildings, hotels, stores and other investment property has more than doubled since September to 1.8% this month, according to data provided to The Wall Street Journal by Deutsche Bank AG. While that's low compared with the home-mortgage delinquency rate, it's just short of the highest rate during the last downturn early this decade.

Some experts say it now looks as if the current commercial real-estate slump will rival or even exceed the one in the early 1990s, when bad commercial-property debt played a big role in dragging the economy into a recession. Then, close to 1,000 U.S. banks and savings institutions failed. Lenders took about $48.5 billion in charges on commercial real-estate debt between 1990 and 1995, representing 7.9% of such debt outstanding...

This is one area in particular where banks are carrying assets an unrealistically high levels. Citigroup (C) is marking many of its loans at .95 on the dollar and up. And though it's already rivaling the last bust, our sense is that this will prove to be far worse than that one, deliquency-wise, when all is said and done.

This effects the economy on such a broad level.

GGP may or may not be able to organize itself to get out of bankruptcy. The problem is that whether or not it is able to pay off its debt also depends on the income produced by its property assets.

If a retailer is struggling (which many are), it may not be able to meet it's contractual obligation for leasing its space. In other words, no rent paid to GGP if the retailer goes out of business and breaks the lease and an unlikely chance of GGP renting the space to a different retailer in an economic downturn. GGP then has difficulty meeting its debt obligations to financial institutions.

Empty mall spaces = Closed malls = Little to no tax revenue for municipalities and more/deeper write downs for banks holding the commercial real estate assets that are worthless.

Dead Malls

[edit on 16-4-2009 by Sergeant Stiletto]

I heard about this a few months back one time and it was swept under the rug by the MSM. All the BS about the economy getting better is making me gag. I know in my guts that this is going to be the next big bubble to burst. We are just in the eye of the storm people.

Good.

Businesses who thought opening a store front on every block was a sound idea never should have, towns and states who spent more than they absolutely needed to on anything at all never should have and idiot consumers racing to keep up with the latest and greatest crap they saw on TV never should have.

Now if the fed could stop spending money it doesnt have keep all of this "never should have" crap afloat we'd be in business for a proper correction.

The longer we put off the the inevitable the worse it will be. We've already dragged this whole thing out about 80 years.

What gets me is because all the folks who contributed to this garbage dont want to accept reality it's going to cost me money, property and liberty.

It's bad enough I have to live in a society of irresponsible idiots but I also have to tolerate an irresponsible government put in power by the irresponsible idiots perpetuating the irresponsibility that caused all of this in the first place. Absolutely none of this would effect me if it weren't for the governments system of extortion and enforcement. I could go on living my life and never notice any of this but whenever I turn around there's a big red, white and blue gun to my head while hands dig in my pockets.

reply to post by thisguyrighthere


Well, to your first paragraph - endless growth and the insatiable need for more and more and more profit to feed greedy CEOs is just impractical and unsustainable. As is endless consumption. The bill always comes due.

As for the rest of your post. A glorious rant.

Nokia Profits are down 90%
JP Morgan Profits fell 12.5%
Chinas GDP slowed to 6.1%

Look it up at BBC on your own!

And believe it or not the stocks seem to like this news and are up!

Spoke to soon again, Nasdaq Up, SandP Up, Dow is plummeting down 64points when I posted this it was up at least 10-15.

Well I can't keep up with the markets today, there going up and down crazily. If you don't have one get a ticker. There great tools, IMO.
[edit on 16-4-2009 by Republican08]

[edit on 16-4-2009 by Republican08]

I had a thread [below] a while back about this very thing. This is a big problem that nobody seems to talk much about? Combine this with the derivatives bubble [below] and the housing market looks very small! These issues are serious and need more attention.

Peace.





www.abovetopsecret.com...

www.abovetopsecret.com...

Just showed up on Bloomberg also:

www.bloomberg.com...

General Growth Files Biggest U.S. Property Bankruptcy (Update1)

By Daniel Taub and Brian Louis


April 16 (Bloomberg) -- General Growth Properties Inc. filed the biggest real estate bankruptcy in U.S. history after amassing $27 billion in debt during an acquisition spree that turned it into the second-largest shopping mall owner.

The owner of Boston’s Faneuil Hall and the South Street Seaport in New York City ended a seven-month effort today to refinance its debt. The company listed $29.5 billion in assets and debts of about $27.3 billion in the Chapter 11 filing. General Growth will continue operating its more than 200 properties.
..

CNN says "don't worry...it'll be allllll good!"

Is commercial real estate a time bomb?

Marketwatch (and everybody else) says: "not so fast!"

]General Growth: Is the other shoe dropping?

The market started showing signs of cracking last autumn, and recent reports from various brokerages and investors' ratings firms say, among other things, that property prices are expected to drop by one third to one half.

On top of that, more delinquencies are expected in the retail sector with lower consumer spending.

The Fed is jumping in too. Dennis Lockhart, chief of the Federal Reserve in Atlanta, said Thursday: "I am concerned about the commercial real-estate sector and how its performance could affect the banking system, which I addressed in a recent speech."

[edit on 16-4-2009 by theWCH]

Here is an article from last year. Note huge amounts of money we are talking about and retail has suffered more losses since the article was written:

www.pbn.com...

The company – one of the nation’s largest real-estate investment trusts (REITs) – has seen profits turn to losses over the past year as retail sales have faltered and land sales have plunged. In February, General Growth posted a 2007 profit of $287.95 million, or nearly five times the previous year’s $59.27 million, on total revenue that increased 0.2 percent to $3.26 billion. (READ MORE)

Last week, it posted a third-quarter loss of $15.41 million, on total revenue that fell 5.73 percent year over year to $814.70 million. (READ MORE) The company cited a $40.34 million provision for impairment in its master-planned communities division. Occupancy at the retail centers that comprise the majority of its holdings dipped half a percentage point to 92.7 percent, but that decline was partly offset by a 3.8-percent rise in comparable-tenant revenue, General Growth added.

Related thread:

www.abovetopsecret.com...



[edit on 16-4-2009 by Sergeant Stiletto]

I, as well heard about this commercial paper problem a few months ago.

The sub-prime mortgage mess is mailny hitting the banks and the commericial real estate downfall will affect all those Credit Unions who thought they were immuned.

We also have a credit card bubble about to burst that will affect both banks and credit unions.

Next I expect the treasuries bubble burst. One after the other.



[edit on 16-4-2009 by wonderworld]