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Hotel Loan Defaults Double In Second Quarter

“Luxury hotel boom: denver and colorado’s mountain resorts build to suit upper-upper upscale occupants.”

-ColoradoBIZ, July 1, 2006

“The stage is set for Nashville hotel boom as indicators favor expansion”

-Nashville Business Journal, January 19, 2007

“In Las Vegas, Too Many Hotels Are Never Enough”

-New York Times, April 24, 2007

“NYC Hotel Boom Could Help Ease Room Shortage”

-CBS 2 (New York City), December 16, 2007

“Tulsa enjoys hotel boom”

-The Journal Record (Oklahoma City), January 2, 2008

From Bloomberg’s Nadja Brandt and Dan Levy today:

As many as one in five U.S. hotel loans may default through 2010 as the recession means companies are spending less on travel and perks, according to University of California economist Kenneth Rosen.

The value of hotel properties in default or foreclosure almost doubled to $17.3 billion in the second quarter through June 24 from $9 billion at the end of the first quarter, data compiled by Real Capital Analytics Inc. show. The New York-based research firm, which began tracking distressed commercial property in November, expects hotel defaults to increase by as much as $2 billion this quarter, said analyst Jessica Ruderman.

“Hotels without question will have the highest foreclosure rate of any commercial real estate sector,” said Rosen, who runs a real estate hedge fund with $310 million in assets and is chairman of the University of California’s Fisher Center for Real Estate and Urban Economics in Berkeley.

Hotel owners are defaulting as room rates and property values tumble and the securitized mortgage market that fueled an 88 percent gain in U.S. commercial prices from 2001 to late 2008 is dormant.

Luxury hotel revenue fell 28 percent in April from a year earlier and has dropped for 12 straight months, according to Smith Travel Research Inc. in Hendersonville, Tennessee. The 29 percent decline in March was the biggest since October 2001.

A third of the $8.6 billion in securities backed by hotel loans due in 2010 are at risk of defaulting, data compiled by credit-rating firm Realpoint LLC in Horsham, Pennsylvania, show.

Guerrilla marketing?

Source:

“Hotel Loan Defaults Double as Recession Cuts Travel (Update2)”
Nadja Brandt, Dan Levy
Bloomberg, July 1, 2009

Weekend Video

From the Morningstar website earlier in the week:

In May, real estate developers met in Las Vegas to discuss the future of the American shopping mall. Judging by The New York Times’ account of the conference, many developers were reluctant (or unwilling) to entertain the idea that the post-financial crisis world could be much different than the environment that preceded it. Not only were they less-than-attentive to environmental and sustainability concerns, they seemed indifferent to the fact that consumer spending had fallen off a cliff and is likely to remain subdued for years to come. Many, though not all, were waiting for things to get back to normal–the way they were before the crash…

Guess these developers haven’t figured out the party’s over yet…

The Fabulous Thunderbirds, “Wrap It Up” (1986)
YouTube Video Link

Small And Midsize Banks Threatened By Bad Commercial Real Estate Loans

Sounds like there’s the potential for more rough sailing ahead for the U.S. banking industry. Especially when it comes to the smaller players. From the
Wall Street Journal’s David Enrich and Maurice Tamman yesterday:

Commercial real-estate loans could generate losses of $100 billion by the end of next year at more than 900 small and midsize U.S. banks if the economy’s woes deepen, according to an analysis by The Wall Street Journal.

Such loans, which fund the construction of shopping malls, office buildings, apartment complexes and hotels, could account for nearly half the losses at the banks analyzed by the Journal, consuming capital that is an essential cushion against bad loans.

Total losses at those banks could surpass $200 billion over that period, according to the Journal’s analysis, which utilized the same worst-case scenario the federal government used in its recent stress tests of 19 large banks. Under that scenario, more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators. The potential losses could exceed revenue over that period at nearly all the banks analyzed by the Journal.

The potential losses on commercial real estate are by far the largest problem facing the midsize and small banks, easily exceeding losses on home loans, which could total about $49 billion, according to the Journal’s analysis. Nearly one-third of the banks could see their capital slip to risky levels because of commercial real-estate losses, the Journal found.

The Journal, using data contained in banks’ filings with the Federal Reserve, examined the financial health of 940 small and midsize banks. It applied the loan-loss criteria that the Fed used in its stress tests of the largest banks.

The findings are a stark reminder that the U.S. banking industry’s problems stretch far beyond the 19 giants scrutinized in the government stress tests. Regulators and investors have focused on too-big-to-fail banks such as Bank of America Corp. and Citigroup Inc. But more than 8,000 other lenders throughout the country are being squeezed by the recession and real-estate crash.

19 institutions does not a banking system make…

Source:

“Local Banks Face Big Losses”
David Enrich, Maurice Tamman
Wall Street Journal, May 19, 2009

Commercial Real Estate Poses Danger For Regional Banks

Anyone know who Tom Barrack, Jr., is? Besides being one of the legendary investors followed on Boom2Bust.com’s sister blog, Investorazzi.com, back on October 31, 2005, he made the cover of Fortune as “The World’s Greatest Real Estate Investor.” Donald Trump once said, “Tom has an amazing vision of the future, an ability to see what’s going to happen that no one else can match.”

And these days, Barrack sees danger ahead for regional banks from commercial real estate assets.

From Henry Sender of the Financial Times (UK) last Friday:

The Federal Reserve’s stress-test estimate that 19 leading US banks could face losses of $53bn on commercial real estate assets is raising fears that many smaller banks could be facing big losses on their loans to the sector.

Experts anticipate that commercial real estate prices will drop another 20 per cent – on top of the 30 per cent drop so far. “There are two revaluations going on,” said Michael Pralle, a veteran real estate investor. “The risk premium is going up, the cost of debt is going up and the amount of leverage available is coming down.”

The Fed predicts that under a “more adverse scenario” for the US economy, the 19 banks that it subjected to stress tests could lose a combined $53bn, or 8.5 per cent, of the $600bn or so of commercial real estate assets on their books…

However, some investors and analysts said they suspect the problems for regional banks could be severe. They note that losses on commercial real estate loans can be difficult to track because different banks include different kinds of loans in the category.

Regulators “are underestimating the weight of what will happen”, says Tom Barrack, head of real estate private equity firm Colony Capital, expressing particular concerns about lower-quality shopping mall developments. “The regional banks are where the TNT is buried.”

Source:

“Commercial real estate fears for regionals”
Henry Sender
Financial Times (UK), May 8, 2009

Friday Freebie: The “A-Letter”

I love free stuff. And I bet a lot of you do as well. Which is why I’m starting a new series called “Friday Freebie,” where every so often I’ll introduce you to some free, yet possibly useful, finds of mine related to topics covered in this blog, starting with this post.

One of my favorite free newsletters that I like to read on a regular basis is the “A-Letter” that’s published by The Sovereign Society. The “A-Letter” is their “free offshore financial e-newsletter containing late breaking news, commentary and ground breaking advice about everything effecting the ‘offshore world’ delivered straight to your email inbox, six times per week.” Anyway, I thought the April 1 edition of the “A-Letter” was a real keeper— and thought-provoking. Here’s an excerpt from that issue:

2009 seems to be working out to be the “year of the fool” judging from headlines like…

 The Social Security Surplus is already gone…fini…no more. “Expected” to last through 2017, thanks to rosy estimates from the bean-counters in Washington, the surplus was annihilated in last year’s stock market crash…meaning the U.S. government will likely need to raise hundreds of billions more in Treasury sales in the coming years…aside from the trillions already scheduled, of course.

 Apparently dissatisfied with only causing the biggest bankruptcy in recorded history, a former Lehman Exec decided to gamble with 44 million American pensions. Former Lehman Managing Director Charles Millard – acting as head of the Pension Benefit Guarantee Corp. (PBGC, the federal government’s safety net for pensions) – boldly moved a substantial portion of the PBGC’s funds out of “boring” bonds and into promising stocks…all in hopes of avoiding a future government bailout. Unfortunately, he started this plan mid last-year, and his picks were already down by 23% at the end of September ‘08. Oh yeah, and he was almost a trillion in deficit when he started.

 Obama says Detroit Bankruptcy Restructuring is “inevitable,” after the latest round of media back-and-forth that pushed Waggoner out the door with a US$20 Million+ retirement package. I can’t tell you how glad I am that we gave these yahoos US$17 Billion last year just to stall the bankruptcy process for a few months. What a great investment that was.

 And on a similar note (wink wink) “The administration of President Obama is suffering very, very strong pressure from sectors affected by the U.S. economic recession,” (ed.: *cough* UAW *cough*) “and that is preventing it from acting correctly,” said Mexican President Felipe Calderon in a recent interview. A look at the list of Obama’s biggest campaign contributors suggests that Felipe was right on. Change? Well, I suppose changing from a neo-conservative puppet of an oil-man to a “bought and & paid for” cog in the Chicago machine does count as “change.”

 And just when you thought hypocrisy couldn’t possibly raise itself to new heights in Washington, President Obama nominated yet another tax dodger to his cabinet in Kathleen Sebelius, his nominee to Health and & Human Services. She owes US$7,000 in total due to some “unintentional mistakes.” Funny thing is, when I make an “unintentional mistake” on my returns, I tend to get whacked with fees, calls and threats from the IRS. Good thing she’s a member of the “Washington Club.”

 Housing Prices are Falling Faster than any other time on record, at least according to Case Shiller’s highly reliable statistics. The 20-city average decline hit 19% in January, muffling any speculation of a bottom forming in the housing market.

 Banks are Refusing to Take Ownership of Properties at the End of the Foreclosure Process in cities all across America, because the cost of the process is higher than the rapidly-declining value of the underlying real estate. But homeowners aren’t off the hook…they’re still obligated to take care of their mortgage and handle any maintenance and repairs that occur in the months after they vacate due to foreclosure.

 Commercial Real Estate Lenders are hesitating to push borrowers into bankruptcy for reasons ranging from misguided optimism to the harsh reality of having to write those debts off. As evidenced by companies like General Growth Properties and Centro, CRE borrowers are staving off bankruptcy for much longer than they would in any other situation. Apparently wishful thinking still qualifies as a business plan in some circles.

 And now the OECD is pleading the EU to begin Quantitative Easing, aka “printing money and throwing it at the problem.” Germany’s so far been vehemently against the idea, for reasons including the problems Eric highlighted with QE in the EU.

So…Which One was the Joke?

Could you figure it out? Which one of the above was a joke?

Well…you’re right. None of them were; they’re all real. I suppose that’s the joke…albeit a very morbid and existentialist joke. But hey, I work with what I’ve got.

And what’s worse; following this crisis as it unfolds on a daily basis, watching every blip of news and trying to decipher what it means for you and I – I’m starting to feel like the joke’s on us.

Us the taxpayers…us the voters. Even us the dollar holders, because the “inflation tax” that will surely follow Washington’s blundering bailouts will bushwhack the value of everyone’s dollars…no matter whether you’re American, Mexican, pink, purple, green or some lily-livered presidentially-appointed tax-cheat.

Hey, who said there was no such thing as a free lunch?

Source:

“In 2009, Every Day is April Fool’s Day!”
“A-Letter” Newsletter
Matt Collins
Sovereign Society, April 1, 2009

On The Verge Of A Commercial Real Estate Crisis?

Back on February 4, University of Chicago economics professor Casey Mulligan had the following to say about a potential commercial real estate crisis in the United States. From the New York Times’ “Economix” blog:

For months now, experts have been predicting that commercial real estate will be “the other shoe to drop.” But in fact, non-residential building fell far behind housing construction during the housing boom. This shortage of commercial buildings relative to housing suggests that a commercial real estate crisis will not occur, or that at worst it will occur with much less severity than did the housing crash.

Mulligan produced a chart to show little, if any, nationwide surplus of non-residential buildings, and concluded:

I continue to watch the economy in 2009 but, barring a significant further decline in business activity, I do not expect to see a nationwide surplus of commercial real estate and therefore do not expect to see commercial real estate suffer the kind of crisis that followed from the housing surplus.

On the other hand, there are others who believe we are on the verge of a major CRE crisis. From the Associated Press last Thursday:

With loan defaults rising, analysts say the struggling commercial real estate industry is poised to fall into the worst crisis since the last great property bust of the early 1990s.

Delinquency rates on loans for hotels, offices, retail and industrial buildings have risen sharply in recent months and are likely to soar through the end of 2010 as companies lay off workers, downsize or shut their doors…

While the commercial real estate industry’s woes led to the recession of nearly 20 years ago, this time the industry is “the victim of the economic and financial crisis,” said Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services in Walnut Creek, California.

Vacancies at retailers, Nadji forecasts, will shoot up to 11 percent by year-end, matching the peak of the early 1990s. Office vacancies are likely to hit 18 percent by year-end, he said, short of the 1990s-era peak of more than 20 percent.

The commercial real estate market is “at the precipice,” a report by Detusche Bank said earlier this month. So far this year, delinquency rates are up to 1.8 percent of loans in March, more than four times the year-ago level.

Faring worst were retailers, office building owners and apartment buildings. Hotels and industrial properties posted more moderate increases.

Deutsche Bank’s Richard Parkus projects delinquency rates will keep soaring to more than 3.5 percent by year-end and as high as 6 percent by late 2010. He says the industry’s woes will be “at least of a similar magnitude as those that the commercial real estate faced in the early 1990s.”

Drops in property values of 45 percent from a peak in late 2007 are possible, Parkus said, exceeding those of the early 1990s, as demand for office, retail and other commercial space plummets amid a worsening economy.

There are other problems related to CRE loans that go beyond delinquent payments. From the AP piece:

Funding for commercial loans virtually shut down last year as the financial system unraveled.

There was $12.2 billion in commercial mortgage debt issued last year, the lowest figure since 1991 and down 95 percent from 2007, according to a report by Reis.

Making matters worse, about $216 billion in loans are coming due through 2012.

That is putting landlords in a squeeze.

And, contrary to the University of Chicago professor, CRE’s naysayers point out a surplus of properties must be taken into account. From the article:

About $11 billion of distressed commercial property is currently up for sale, compared with a lackluster $2.7 billion worth of properties that were actually sold in February, according to Real Capital Analytics.

A growing imbalance between supply and demand is likely to push down prices in the coming months, analysts say.

They also see similarities between the residential and commercial real estate markets:

Similar to the residential property market, foreclosures and defaults are surging, with nearly $19 billion in commercial real estate loans in default, foreclosure or bankruptcy so far this year, according to Jessica Ruderman, a senior analyst with Real Capital.

More than 20 metropolitan areas nationwide now have at least $1 billion in troubled commercial loans, she said, up from five at the end of last year. Landlords in Las Vegas, Manhattan and Los Angeles are struggling the most.

Stay tuned, folks.

Sources:

“A Commercial Real Estate Crisis? Probably Not”
Casey Mulligan
New York Time (Economix Blog), February 4, 2009

“Commercial real estate loan defaults skyrocket”
Associated Press, March 26, 2009

Analyst: Over 1,000 Bank Failures On Tap

An analyst for Royal Bank of Canada-affiliated RBC Capital Markets is predicting a large number of bank failures over the next couple of years. From MarketWatch’s Alistair Barr yesterday:

More than 1,000 banks may fail during the next three to five years as the recession intensifies and loan losses climb, an analyst at RBC Capital Markets estimated on Monday.

In 2008, analyst Gerard Cassidy forecast 200 to 300 bank failures, but now he says the environment has deteriorated since then.

“Residential mortgage delinquencies remain at record levels, home-equity loan defaults are steadily rising and residential construction and land loan non-performing assets are skyrocketing for lenders with excess exposure to the weakest housing markets in the U.S.,” Cassidy wrote in a note to clients.

“In conjunction with the slowdown in the economy, credit deterioration has accelerated in the commercial and industrial and commercial real estate loan areas,” he said.

Since the mortgage-fueled credit crunch erupted in 2007, 34 banks have failed in the U.S. While Washington Mutual became the biggest bank failure in history last year, Cassidy expects most of the banks that collapse will be relatively small, with less than $2 billion in assets.

Source:

“More than 1,000 banks may fail, analyst estimates”
Alistair Barr
MarketWatch, February 9, 2009

Goldman Sachs Predicts Loan Losses Will Top $2 Trillion

Despite all the hoopla about stimulus plans and bailouts rescuing Americans’ home equity and retirement accounts, the Wall Street Journal’s Jon Hilsenrath reminds us today of an important concept regarding the U.S. economy. No matter how much you might want to, you cannot ignore the fundamentals. Hilsenrath wrote in the Journal’s “Real Time Economics” blog this afternoon:

It is little wonder financial markets are taking a beating. Despite all of the talk of fiscal stimulus and the hope of a new administration, one very large figure stands in the way of a real economic recovery. That number is $2 trillion — the losses that investors and financial institutions are potentially sitting on from bad loans…

Analysts at Goldman Sachs were the latest to jack up estimates of potential U.S. loan losses. In a report released late Tuesday night, Goldman economists estimated that losses from delinquent U.S. residential mortgages alone would hit $1.1 trillion as home prices sink, up from an earlier estimate of $780 billion.

Add in losses from commercial real estate, credit cards, auto debt and business debt and Goldman’s loan loss estimate hit $2.1 trillion. Many of those losses will be born by investors and banks overseas, though the estimate doesn’t count losses that U.S. institutions will take on bad overseas loans that they hold.

And it looks like more bad news about loan losses will be coming down the pipeline. From the piece:

“Financial institutions are likely to remain under considerable pressure from rising US credit losses,” Goldman economist Jan Hatzius said in a research note on the issue. He added, “Loss recognition by US financial institutions still has a long way to go.”…

Goldman analysts estimate that only $1 trillion worth of losses have been recognized, leaving financial institutions and investors with more write-offs, in need of additional capital and reluctant to make new loans.

Source:

“Banks’ Loan Losses Could Reach $2 Trillion”
Jon Hilsenrath
Wall Street Journal (Real Time Economics blog), January 15, 2009

Bailouts Gone Wild

That’s the best headline I could come up with for all this nonsense coming across the wires concerning Washington’s handout, I mean, bailout. From the Associated Press’ Frank Bass and Rita Beamish this past weekend:

Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals.

The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.

Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.

The total amount given to nearly 600 executives would cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their bottom lines…

I was curious to find out more about these “benefits.” Bass and Beamish dished out the goods:

Banks that got bailout funds also paid out millions for home security systems, private chauffeured cars, and club dues. Some banks even paid for financial advisers. Wells Fargo of San Francisco, which took $25 billion in taxpayer bailout money, gave its top executives up to $20,000 each to pay personal financial planners.

At Bank of New York Mellon Corp., chief executive Robert P. Kelly’s stipend for financial planning services came to $66,748, on top of his $975,000 salary and $7.5 million bonus. His car and driver cost $178,879. Kelly also received $846,000 in relocation expenses, including help selling his home in Pittsburgh and purchasing one in Manhattan, the company said.

Goldman Sachs’ tab for leased cars and drivers ran as high as $233,000 per executive. The firm told its shareholders this year that financial counseling and chauffeurs are important in giving executives more time to focus on their jobs.

JPMorgan Chase chairman James Dimon ran up a $211,182 private jet travel tab last year when his family lived in Chicago and he was commuting to New York. The company got $25 billion in bailout funds.

Not to be outdone by his AP colleagues, Matt Apuzzo dug up more disturbing material on the Great American Giveaway. He wrote yesterday:

It’s something any bank would demand to know before handing out a loan: Where’s the money going?

But after receiving billions in aid from U.S. taxpayers, the nation’s largest banks say they can’t track exactly how they’re spending the money or they simply refuse to discuss it.

“We’ve lent some of it. We’ve not lent some of it. We’ve not given any accounting of, ‘Here’s how we’re doing it,’” said Thomas Kelly, a spokesman for JPMorgan Chase, which received $25 billion in emergency bailout money. “We have not disclosed that to the public. We’re declining to.”

Apuzzo added:

The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings, and what’s the plan for the rest?

None of the banks provided specific answers.

Kind of reminds me of that scene from “Monty Python and the Holy Grail” when King Arthur and his men come across a castle with its French guards, and ask to see their grail:

ARTHUR: Well, um, can we come up and have a look?
GUARD: Of course not! You are English types-a!
ARTHUR: Well, what are you then?
GUARD: I’m French! Why do think I have this outrageous accent, you silly king!
GALAHAD: What are you doing in England?
GUARD: Mind your own business!
ARTHUR: If you will not show us the Grail, we shall take your castle by force!
GUARD: You don’t frighten us, English pig-dogs! Go and boil your bottoms, sons of a silly person. I blow my nose at you, so-called Arthur-king, you and all your silly English kaniggets… now go away or I shall taunt you a second time-a!

Best-of-show has to go to AP writer Christopher S. Rugaber for his piece from earlier today. He wrote:

Meanwhile, financial industry groups are pushing to use the bailout fund to help a wider array of companies, including automotive financing companies such as GMAC Financial Services. GMAC is 51 percent owned by Cerberus Capital Management LP, a private equity firm; General Motors owns the rest.

GMAC, which provides financing for GM vehicle and dealer loans along with home mortgages, is having trouble finding adequate support from its bondholders for a debt transaction that would allow it to become a bank holding company and gain eligibility for bailout money.

Commercial real estate developers said Monday they also are petitioning the government for support from the $700 billion rescue fund. The Real Estate Roundtable said an estimated $400 billion of commercial real estate mortgages will come due by the end of 2009 without adequate refinancing options.

Industry officials said thousands of office buildings, hotels, shopping centers and other commercial buildings could be headed into foreclosure or bankruptcy unless the government provides support.

The madness continues…

Sources:

“AP study finds $1.6B went to bailed-out bank execs”
Frank Bass, Rita Beamish
Associated Press, December 21, 2008

“Where’d the bailout money go? Shhhh, it’s a secret”
Matt Apuzzo
Associated Press, December 22, 2008

“More companies lining up for piece of bailout fund”
Christopher S. Rugaber
Associated Press, December 23, 2008

Jim Cramer Says U.S. Will Not Have Another Great Depression

Ever notice CNBC television personality Jim Cramer is big on making bold statements? From CNBC’s web editor Tom Brennan yesterday:

“Enough with the hysteria,” Cramer said during Tuesday’s Mad Money, we’re not going to suffer another Great Depression.

Sure, there are plenty of things to worry about: We need the European Central Bank and the Bank of England to make big interest-rate cuts. Friday’s unemployment number should be dreary. And jobless homeowners equal more foreclosures. Commercial real estate, too, is a problem. There’s also a weak China, which has all but disappeared since the Olympics. But we’re nowhere near the devastation seen 75 or more years ago.

There’s no 33% unemployment nor are we in danger of massive bank failures. Housing prices have fallen far enough to, in addition to the decline in building permits, signal a bottom by June 30 of next year, which is what Cramer’s been saying all along. Washington has taken the necessary steps to save our financial system, most recently with Citigroup, hopefully the model going forward. And with Fannie and Freddie , AIG , Lehman Brothers, Wachovia and Washington Mutual all taken care of in one way or another, so there probably are no more surprises to be had.

Another thing to keep in mind: We still have the safeguards put in place as part of the New Deal the prevent another Great Depression, like the FDIC, Social Security, unemployment insurance and the Federal Housing Authority.

So forget all the talk you’ve been hearing lately. If these talking heads wanted to worry about a Great Depression, they should have followed Cramer’s lead a few thousand Dow points ago. There are things to be concerned with – the ECB, China, etc. – but we’re not in the dire straights we were before.

What lead is that? Telling “Mad Money” viewers on July 29 that the stock market bottomed July 15, with the Dow Jones Industrial Average at 10,962.54 and the S&P 500 at 1,214.91? After all, it WAS a few thousand Dow points ago.

Source:

“Cramer’s Problem With Doom and Gloom”
Tom Brennan
CNBC, December 2, 2008

Commercial Real Estate Crisis Grows

Bad news is quickly shifting from residential real estate to the commercial real estate market. Matt Apuzzo of the Associated Press wrote Thursday:

The full scope of the housing meltdown isn’t clear and already there are ominous signs of a new crisis — one that could turn out the lights on malls, hotels and storefronts nationwide.

Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in. Malls from Michigan to Georgia are entering foreclosure.

Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies’ credit.

“We’re probably in the first inning of the commercial mortgage problem,” said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That’s bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Apuzzo explained that the CRE crisis could grow into a full-blown meltdown. From the piece:

Companies have survived plenty of downturns, but economists see this one playing out like never before.

In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans.

But many banks no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.

Unlike home mortgages, businesses don’t pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

The retail outlook is particularly bad. Circuit City and Linens ‘n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.

Those retailers typically were paying rent that was expected to cover mortgage payments. When those $20 billion in mortgages come due next year — 2010 and 2011 totals are projected to be even higher — many property owners won’t have the money. Some will survive, but those property owners whose loans required little money up front will have less incentive to weather the storm.

Refinancing formerly was an option, but many properties are worth less than when they were purchased. And since investors no longer want to buy commercial mortgages, banks are reluctant to write new loans to refinance those facing foreclosure.

California, New York, Texas and Florida — states with a high concentration of mortgages in the securities market, according to Fitch — are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia.

The worst-case scenario goes something like this: With banks unwilling to refinance, a shopping center goes into foreclosure. Nobody can buy the mall because banks won’t write mortgages as long as investors won’t purchase them.

Look at the bright side. At least the mall rats will be back.

I know, stick to my day job…

Scene from “Mallrats” (1995)
YouTube Video Link
Warning! Foul language and animal cruelty… sort of

Source:

“Malls, hotels next victims in new mortgage crisis”
Matt Apuzzo
Associated Press, November 27, 2008

Related Post

From our sister blog Investorazzi.com this morning:

“Tom Barrack: Commercial Real Estate In ‘Massive Meltdown’”

“Here is the Cliff Notes summary – Real estate is experiencing a seismic liquidity shock as a result of a complete closure of the credit and capital markets for both debt and equity. CRE and the debt which fueled its growth are in a massive meltdown.”

Vacancies Up At Strip Malls, Regional Malls

Because of this blog and other projects I am working on— I don’t get out much these days. But when I do manage to escape the cage, I’ve noticed more and more empty storefronts in business districts, strip malls, and regional malls around the Chicagoland area. It’s not like I specifically look for them either. Even my father noticed it as we drove back from breakfast this morning. “Look at all those empty stores,” he remarked, as we drove through the downtown area of one of the western suburbs.

So I wasn’t too surprised when I came across a piece by Illaina Jonas of Reuters UK, which said the second quarter was the worst quarter for strip malls in 28 years due to store closings and cutbacks. Using data provided by real estate research firm Reis, Jonas wrote this past Monday:

Strip malls, which are usually anchored by grocery or drug stores, saw average vacancies spike 0.5 percentage points to 8.2 percent, a level unseen since 1995, according to the report released on Monday…

For the first time since 1980, more space became available to rent at strip malls than was rented out – about 3.2 million square feet more. Part of the available space came in the form of 5.7 million square feet of new development that came on the market during the quarter.

Looking For A New Hangout?
Jay & Silent Bob From “Clerks 2” (2006)

Jonas talked about the sources of the strip mall woes. She wrote:

A growing list of retailers shuttered stores ahead of lease expirations or chose not to renew leases, and as newly completed space hit the market without signed tenants…

Consumers are constrained by increases in food and energy costs, as well as the cost of servicing debt run up during the housing boom. In addition to cutting back on clothing, jewelry and nonessentials, they have turned to lower-price grocers such as Wal-Mart at the expense of the upper end usually found at strip malls, such as Whole Foods Market Inc., Reis said.

It’s not just the strip malls that are hurting. The Reuters reporter noted:

Vacancies at regional malls rose 0.4 percentage points to 6.3 percent, the highest level since the first quarter of 2002, according to the preliminary results.

The result of growing vacancies, Jonas said, was downward pressure on rents charged by landlords.

Not a good time to be a mall tycoon…

Source:

“US retail property 2nd-qtr worst in 30 yrs – Report”
Ilaina Jonas
Reuters (UK), July 7, 2008

FDIC Ads: Should We Be Worried?

Leafing through the June 30 issue of Time magazine, I stumbled upon an advertisement from the Federal Deposit Insurance Corporation, or FDIC…

For those readers not familiar with the FDIC, their mission, according to their website, is to preserve and promote public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

Now, the FDIC says the ads were meant to commemorate the seventy-fifth anniversary of its creation as an “independent agency” of the U.S. government. However, some suspect there may be an ulterior motive for the ad program. Keep in mind that back on February 26, I discussed in a post how the fourth quarter of 2007 was the worst bank and thrift performance since the fourth quarter of 1991, whereas the FDIC classified 76 banks as “problem” institutions for the quarter (up from 65 a quarter earlier). In addition, it was revealed that the FDIC was looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

Additional justification for the FDIC to roll out a “reassurance campaign” appeared in the following months. On June 5, John Poirier of Reuters talked about an appearance by Federal Deposit Insurance Corporation Chairman Sheila Bair on Capitol Hill, and wrote:

An increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending, Bair told a Senate Banking Committee hearing on the state of the banking industry.

“There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past,” Bair said. “Uncertainties in today’s economic environment continue to pose significant challenges for the banking industry, households, and bank regulators.”

So far this year, four small U.S. banks with deposits insured by the FDIC have failed, up from three in 2007. The agency last week boosted its list of troubled banks to 90, which have a combined $26 billion in assets.

Ironically, the FDIC ad I came across featured a photo of the $100,000 Series 1934 Gold Certificate featuring the portrait of President Wilson, the largest denomination of currency ever printed by the Bureau of Engraving and Printing. Nothing more comforting than seeing the words “insuring” and “protecting” next to the image of a U.S. gold certificate with the phrase “one hundred thousand dollars in gold payable to bearer on demand as authorized by law.” Too bad those dollars sitting in banks across the United States haven’t been backed by the precious metal since 1971, when President Nixon abandoned the Bretton Woods Agreement and effectively took the U.S. off the gold standard. As the U.S Treasury says on its website:

Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything.

Oh, Tricky Dick, what another fine mess you’ve gotten us into…

Source:

“UPDATE 1-Bigger U.S. bank failures may be coming – FDIC”
John Poirier
Reuters, June 5, 2008