I drove by the mall in my home town of Huntington Beach and noticed that several of the major "anchor tenants" were gone and their thousands of square feet of stores were boarded up. I also noticed that maintenance on the western half where the vacant stores congregate is abysmal. If foot traffic is discouraged for the remaining merchants, this may be a downward spiral that increases speed. On top of residential foreclosures, commercial real estate may add a giant negative impulse onto the fiancial recovery. At the beginning of April, the foreclosure auction of the John Hancock Tower, the tallest building in New England, resulted in a resale for about half of its last sale value three years ago. Then, about a week ago, General Growth Properties, which ownes about 200 large malls in the US, filed Chapter 11 bankruptcy. What can we expect in the next year, or so, for commercial property? Jump and see.
Commercial real estate delinquencies (90+ days late), heretofore exempt from the largely residential foreclosure frenzy, are now around 1% and growing exponentially. George Soros although known for some hyperbole, says that it is "inevitable" that commercial real estate falls another 30%. Rents are falling, tenant bankruptcies are rising, there is tons of debt to be refinanced for which there is no market, so cap rates are rocketing and "ghost mall" has joined the recessionary lexicon.
But, how big is the problem? Commercial real-estate debt is potentially more dangerous to the financial system than debt classes such as credit cards and student loans because of its size. The Real Estate Roundtable, a trade group, estimates that commercial real estate in the U.S. is worth $6.5 trillion and financed by about $3.1 trillion in debt. Partly because the commercial real-estate debt market is nearly three times as big now as in the early 1990s, potential losses in dollar terms looms larger according to the WSJ.
The National Association of Realtors official CROE report is summarized:
The fundamentals in commercial real estate are feeling the stress of a slowing economy and troubled credit markets. Job growth, particularly in office-using industries, has been declining. Vacancy rates are expected to rise in all sectors due to decreased demand. The financial decline is squeezing credit availability for commercial projects. As a result, transaction activity is down over 50 percent compared with last year.
According to the NYTimes: http://www.nytimes.com/...
"We have fallen further faster than any time in the last 20 years," said Mitchell S. Steir, chief executive of Studley, a national brokerage firm that represents tenants. "There has been more damage to real estate values in the last four months than in any other four-month period. The pace with which it has occurred has been astonishing."
The "green shoots" that the talking heads repeat for each other are non-sense. They missed the fall and are overly optimistic about the recovery. We're years away from attaining anything close to a recovery.