Thursday, August 13, 2009

Commercial Real Estate Bubble

I did a blog post earlier about troubled malls and the coming commercial real estate bubble - but now it is becoming more and more evident that this will indeed hit - and Connecticut cities are on the list

USNews posted this report about the 10 Cities Facing the Next Real Estate Bust
... another real estate tsunami is about to swamp many American cities. This time, it will be office buildings and retail space going vacant and facing foreclosure.

Like housing, commercial real estate goes through booms and busts, and the coming wipeout is likely to be a doozy. Commercial developers went on their own spending spree earlier this decade, racing to cash in on the hot economy with new office towers, hotel complexes, and retail projects. Banks supplied hundreds of billions of dollars in loans, often assuming that rents paid by tenants would keep going up. ...

Instead of going up, commercial rents have begun to plunge as companies downsize, warehouses empty, merchants go out of business, and huge retailers like Starbucks and Macy's close underperforming stores and demand rent reductions. Office and retail vacancy rates are near record levels and going higher, and developers are about to face crunch time as billions in loans come due for repayment or refinancing over the next three years. Like homeowners who are "under water" on their mortgages, many of those developers owe more than their buildings are now worth.

... Many shopping centers could close completely. Urban development projects have been put on hold or canceled, giving blight a reprieve instead of chasing it out of town. As many as 3,000 banks may face significant losses on commercial real estate loans, according to economist Gary Shilling, which could crimp other lending and even threaten the banks' solvency as losses start to pile up.

... In most of these cities, commercial real estate woes are likely to hamper a recovery. In a few, they'll compound a set of problems that's already profound.

The 10 Cities on the list - where the next real estate bust is likely to hit hardest: (Read the article for more information):

Las Vegas (projected commercial vacancy rate, 2010: 18.1 percent, up 6.8 percentage points from 2008).

Baltimore (15.8 percent, up 6.5 points).

Detroit (24.8 percent, up 6.3 points).

San Bernardino/Riverside, Calif. (15.9 percent, up 6.3 points).

Hartford, Conn. (20.2 percent, up 6 points).

Dayton, Ohio (22.8 percent, up 5.9 points).

New York (12 percent, up 5.9 points).

Charleston, S.C. (16.6 percent, up 5.8 points).

Tacoma, Wash. (13.6 percent, up 5.8 points).

New Haven, Conn. (17.2 percent, up 5.8 points).

Some analysts say, "The biggest problem facing commercial real estate is the threat (98%) of higher interest rates. Rates may double because of the insane levels of government spending. Most business loans are short term in nature, and have to be refinanced in 2-3 years. Not many businesses will be willing to take out a large loan in an uncertain economy with the prospect of rates doubling at refinance time..."

Then there are the conversions going the failed $418M condo conversion which sold for $20M.... developers are losing their projects to their lenders for pennies on the dollar...

Yeah - this recession is very far from over - and no doubt this is going to be another sector that will cry for a bailout.

Update: Colonial Bancgroup fails....

(H/T Leann S.)

1 comment:

christinemm said...

Even in CT suburbs there are empty commercial stores up for rent. But the weird thing is new places are still being built (strip malls) and other spots of woods along state routes are for sale slotted as commercial and some even say good bank locations.

I don't get it how or why new developers are making new strip malls when there are so many vacant spots to rent.

Another thing happening is tearing down vacant strip malls to build new. One strip mall was razed and a Stop and Shop opened up last month in that place. (About 1/8 mile away from a Big Y grocery store)

I still see too many pharmacies, small town having 3-4-5 of the publically traded big companies some within a stone's throw of their competitors. This makes no sense. Also the small stores are moving out into new construction giant stores.

A CVS in my hometown for example was in that location from the 1970's to a couple of years ago when it razed a house, built a new big box looking store on the site and moved across the street. Weird.

I suspect that all registers as growth and 'new stores' on the stats for the company which the shareholders like.

This business of too many chain drug stores with big grocery lines, film developing, and other retail stuff seems out of alignment with reality of consumer demand to me. We don't need so many drug stores!