Home  >  Commercial Mortgage Articles > Commercial Mortgage Update > Page 2

The General Growth filing put 158 of its 200 malls in bankruptcy. According to CoStar, the REIT made the decision to file after its extensive efforts to refinance or extend its overwhelming debt burden proved futile. General Growth reports assets of $29.6 billion in assets and $27.3 billion in debts. It had been marketing several of its Class A mall properties for sale with no deal surfacing, including luxury malls in Las Vegas and historic retail properties in Boston, New York and Providence. The upside of the bankruptcy was the attention it drew from governmental officials, including the Federal Reserve. Dennis Lockhart, chief of the Federal Reserve in Atlanta said, "I am concerned about the commercial real estate sector and how its performance could affect the banking system."

The health of the banks and the extension of credit and the health of commercial real estate and value, are closely intertwined. The General Growth bankruptcy filing was pre-dated by an announcement by Macquarie DDR Trust, a joint venture between Australia-based Macquarie and U.S. retail REIT, Developers Diversified Realty Corporation, to put a portfolio of its 52 U.S. shopping centers up for sale. According to CoStar, the portfolio of 12.5 million square feet is spread across 20 states. The properties consist primarily of community shopping centers with an average occupancy of 88.5% leased to such tenants as Walmart, BJ's Wholesale Club, Bed Bath & Beyond, Best Buy, T.J. Maxx, Kohl's, and Dick's Sporting Goods. In general, there has been a significant increase in the number of retail properties listed for sale. CoStar COMPS research indicates that first quarter 2009 retail property listings (205,251 listings) were up 20.5% from a year earlier. 73 of these properties are listed for $25 million or more.

CoStar's numbers indicate that transaction activity is weak, but there is activity. CoStar's National Retail Report shows 352 retail property sale transactions closed in the fourth quarter of 2008, down from the 478 transactions closed in the third quarter of 2008. CoStar indicates that the imbalance is having a decline in average sales price compared to asking price. The average sale price/asking price ratio declined on first quarter of 2009 to 83%. Assumable financing is having a major impact on sales activity. CoStar did name a number of active institutional buyers, including REITs. However, Kris Cooper, Managing Director of Jones Lang LaSalle Retail Investment Sales team indicates that, unless assumable financing is involved, most deals getting done are $10 million or less and being acquired by private, entrepreneurial investors, particularly those looking for value-add opportunities.

In Deutsche Bank's Commercial Real Estate Outlook Q1 2009, retail delinquencies in CMBS are now rising 20-30 basis points per month. In addition to the decline in consumer spending and increased retailer bankruptcies, leverage is also playing a factor. The generally higher leverage CMBS 2007 vintage delinquency rate is at 2.54%, twice that of pre-2006 vintages.
CoStar also reported on the condition of the national office market, raising the question of the relevance of the quoted vacancy rate currently at a modest 12.5% rate after 15 months of the most severe recession since the 1930s. Andrew Florance, President and CEO of CoStar Group, questioned the 20 million square feet of negative absorption. Mr. Florance said, "Based upon the job losses we've seen to date, we should be seeing something on the order of 450 million square feet of negative absorption compared to the negative 20 [million] we've actually experienced." The report states that in no other time in the past 25 years has so much unlisted and undetected space been available for lease, reasons include: tenants not wanting to acknowledge unneeded space due to financial reasons, established tenants maintaining space to rehire laid off staff, the economic re-leasing impact of underutilized space is minor and therefore a lower priority to other financial issues, tenants concerned that unused space signals financial instability, not recognizing failed tenants due to negative impact to owner balance sheet, difficulty forcing out insolvent tenants, and lenders not recognizing leased/unoccupied space due to negative the value of the assets.

CoStar Group forecasted the U.S. office vacancy rate could rise to 18.2% in 2010. In the 15 largest office markets, total leasing activity was down 46% to 38.8 million square feet in the first quarter of 2009 compared to a year earlier. CoStar's First Quarter Office Review shows Class A prices have dropped 51% from the peak in the first quarter of 2008 to less than $200 per square foot (down 21% in the first quarter 2009 alone); and Class B prices are down 55% since prices peaked in the third quarter of 2008, down to about $130 per square foot.

CoStar indicates that rising unemployment and a drop in consumer spending is also taking its toll on warehouse properties, along with manufacturing and a decline in import/export trade. CoStar reported that the current national warehouse vacancy rate of 9.35% could increase to 11.2% by the end of next year. CoStar projects that this would be the first double-digit vacancy level since the mid-1990's, two recessions ago. The good news is that developers are only delivered 34 million square feet in the first quarter, only 0.1% of the total inventory according to Jay Spivey at CoStar, a level half of the amount of space delivered after the dot-com crash. Cap rates for warehouse have increased to 7.1% from the decade low of 5.8% a year ago. Values are down 17% from the first quarter 2007 high, which is relatively stable compared to office. However, the three quarters of negative net absorption in warehouse is more than was seen in the post dot-com crash.

In the hospitality industry, the economic slump could cause securitized hotel loans to approach the historic 8.37% delinquency rate level experienced in 2003 resulting then from the bursting tech bubble. As quoted in Commercial Mortgage Alert ("CMA"), S&P is projecting the CMBS hotel delinquency rate to quadruple this year. Deutsche Bank research expects the hotel sector to be the hardest hit in the downturn, even exceeding the cumulative default rates of 25% in the 2001-2003 period. CMA reported Revenue per available room ("RevPar") dropped by 15.3% in January and 17.1% in February.

Timing will play a factor since 182 securitized loans totaling $10.4 billion will mature in 2011. CMA also indicates that 60% of all CMBS loans are backed by "luxury", "upper scale" and "upscale" hotels that are most impacted by the cut back in both business and consumer travel. S&P prediction that all CMBS loans will increase to 3 to 3.5% delinquency by yearend, from 1.57% at end of February. Deutsche Bank states that deterioration in CMBS is accelerating rapidly since September of 2008 with 30-day and 60-day delinquency rates up 300-400% in six months. Deutsche also projects a year-end CMBS delinquency rate of 3.5% and further estimates 5 to 6% by late 2010.

About  l  Contact Us  l  Privacy Policy  l  User Agreement  l  Apartment Loan Center  l  Commercial Loan Center  l  Conduit Loan Center