I have written over the past year
or so that the impending crisis in commercial real estate is yet to be fully
felt or appreciated. In the last
couple of weeks, pronouncements from Media sources, think tanks, and real
estate/economics conferences have reinforced my prediction and belief. The ‘Other Shoe’ that hasn’t fallen yet
in this sad economy is about to fall – and, when it does fall, it just might
clobber that shopping mall, office building and other commercial real estate
right in your town.
I spent a few days in Cleveland in
late Summer appearing at a Mediation of a commercial real estate case (the
‘horse-trading’ exercise in what is called ADR – Alternative Dispute
Resolution; otherwise known as the full-employment-for-retired judges
settlement procedure which has swept our legal system.) We sat in a largely empty office building
downtown, looking out over misty Lake Erie, and heard stories of many other
empty or near-empty office buildings in that recently refurbished downtown that
was the bright hope of so many there.
I keep thinking about that nearly empty office building, those empty,
huge corridors and all the people adversely economically affected by that
emptiness.
People and entities who either
invest in, or make their living via, commercial real estate (everything that is
not a single-family residence), are worried right now, and with good
reason. The mortgages and other
loans which made ownership of those properties possible are either coming due,
due, or overdue. In a normal world
without economic disasters, the owners would re-finance ("Re-Fi") those
properties for a new loan term, probably take out some money to reduce their
own money at risk, maybe buy another property, or do some deferred or periodic
maintenance with that money, and life would go on as it has gone on for decades
now. You wouldn’t even notice from
outward appearances.
This time around in that lifecycle,
it is different. For one thing,
the properties have dramatically lost value since their last appraisals which
helped secure those loans now coming due.
Sometimes 40/50, even 60%!
For another, lenders (terrified of ticking time-bombs on their own
balance sheets) are just not lending these days. The combination is absolutely
deadly.
A wicked domino effect is at
work. Commercial real estate loses
tenants when those tenants downsize, go broke, file bankruptcies (which
conveniently allow them to ‘accept or reject’ their leases) or just
disappear. Every property has a
break-even point, past which, they become a non-producing piece of dirt with
structure attached, into which you continue to pour money. If your tenants cannot pay you, sooner
or later, you cannot pay your mortgage.
Your lender then forecloses and you do not own your commercial property
any more – all you have to show for it is a smoking hole where your credit
score used to be.
Shopping centers depend on what are
called ‘Anchor Tenants," often the biggest and best retailers, many of whom are
praying for this coming, year-end holiday and Christmas season to rescue them
and turn their accounting year from red to black. Many retailers file bankruptcy in January when that last
hope fails. There will be a long
line come next January of the science-fiction-sounding year, 2010.
Without tenants, especially Anchor
Tenants, smaller tenants do not get the benefit of their bargain from their lease
any more, plus suffering from their own economic problems, layoffs, customers
dragging out payments, or just crapping out entirely.
There are a whole lot of loans
coming due next year. The
ownership of whole lot of commercial properties is affected; some owners are
more well-heeled than others and can last longer; there are some who are out
right now using their Vulture Funds to pick clean the carcasses and buy
distressed properties for a fraction of the 2003-2007 era, swollen Go-Go
prices. The rest are at risk. Trouble in commercial real estate is
coming to a neighborhood near you.
It would be helpful if Congress could take its eye off the current
agonies over HealthCare a moment to address this issue of where on God’s Green
Earth those re-fi’s are going to come from, next year and beyond, before it is too late.