Commercial Real Estate Imploding

There has been lots of news about commercial real estate in the past week. None of it is any good. Let's take a look.

U.S. mall vacancy rates rise as economy slides

The vacancy rate at U.S. strip malls rose to the highest level since 1996 in the first quarter of 2008, while that for big malls reached levels unseen since 2002, research firm Reis said on Friday. The amount of space occupied by retailers fell for the first time since Reis began tracking the sector in 1980.

"Retailers are grappling with the implications of the housing and job market downturns for consumer activity, with the result that retail sector fundamentals -- occupancy and rent levels -- are being strained by anemic demand for space," Reis chief economist Sam Chandan said in statement.

Strip mall vacancies rose 0.2 percentage points from the preceding quarter to 7.7 percent. By the end of the year, the rate likely will reach or surpass 8 percent, Reis said. The vacancy rate for big regional malls was the highest since the fourth quarter of 2002, the report said.

Subprime Losses Concentrated At Large Banks, CRE At Smaller Banks

A.M. Best Special Report: Subprime Losses More Prevalent Among Largest Institutions

With the exception of some states, notably Texas, a pattern of distinct regional credit issues is emerging that is reminiscent of the real estate crisis in the mid-1980s.

When disregarding the largest 200 banks, commercial real estate risk is the leading contributing factor to overall credit risk for mid-size and small banks.

Smaller Banks Face Growing Commercial Real Estate Risk

A new report released Monday by credit rating agency A.M Best, however, found that credit risk may quickly be beating a path to the door of smaller regional and community banks. In particular, with the exception of some states — notably Texas — the agency warned that “a pattern of distinct regional credit issues is emerging that is reminiscent of the real estate crisis in the mid-1980s.”

For the smaller banks below the top 200 institutions, high nonperforming asset rates are concentrated in the Midwestern, Central, Southeastern and West Coast regions; Alaska, Arizona and Arkansas rank as the worst three states on overall asset quality.

Late payments on US consumer loans at 16-year high

Credit and debit card delinquencies rose to 4.38 percent from the third quarter's 4.18 percent, following four straight quarterly declines.

Housing wasn't spared. Delinquencies on home equity loans rose to a 2-1/2-year high of 2.39 percent, and on home equity lines of credit rose to 0.96 percent, matching a level last seen in the fourth quarter of 1997.

The ABA study covers more than 300 banks that extend a majority of outstanding consumer loans. Its study covers direct auto, indirect auto, home equity, home improvement, marine, mobile home, personal and recreational vehicle loans.

Losses tied to mortgages, credit cards and other consumer loans are expected to hurt quarterly results at large lenders such as Citigroup Inc (C), Bank of America Corp (BAC) and Wachovia Corp (WB), and at more specialized lenders such as GMAC LLC, the auto finance and mortgage company.

Consumer Blues

That last article might not seem to be related to commercial real estate at first glance, but it strikes at the very heart of the matter: Consumers are tapped out. They cannot afford to eat out, so they don't. They cannot afford trips to the nail salon so they stop going. They cannot afford the latest gadget at Best Buy so they do not buy it. Slowing consumer spending causes huge pressures in lease rates.

Stores are going bankrupt at an increasing rate. I talked about this recently in Bankruptcies: The No. 1 Growth Area For 2008.

Now I see Linens 'n Things Expected to File For Bankruptcy.

Linens 'n Things Inc., a home-furnishings retailer caught by an increasing debt load and shrinking housing market, is expected to file for Chapter 11 bankruptcy-court protection by Tuesday, several people familiar with the matter said.

A Linens 'n Things filing would mark one of the first major retailers to seek bankruptcy protection in this economic downturn. The New Jersey retailer, which sells home products like towels, bath rugs and kitchen appliances, has about 590 stores ...[rest by subscription only]

Inquiring minds may wish to review Does The Shopping Center Economic Model Work?

Take a look at the list of store closings in the above link. Expect to add stores from Linens 'n Things to the list.

The Cycle

• Weaker consumer spending leads to layoffs.
• Layoffs lead to weaker consumer spending.

Bernanke is attempting to break the cycle by lowering interest rates. However, lowering interest rates cheapens the U.S. dollar and especially harms those on fixed incomes depending on interest on savings to help them get by. In addition, the weak dollar policy of the Fed is one of the factors behind rising gasoline prices.

By now it should be clear the Fed Is Incompetent And Dangerous.

Please Sign the Petition to Abolish The Fed

Comments

[Jason Rines...:]

Need good leadership in Washington folks. This FED is cleaning up the mess of the last FED who implented 'fairness in lending' standards which was Socialism, a model proven to fail over 6,000 years the idea was first cooked up. I had recent injustice done to me in NH courts when for son's behalf did joint custody agreement with ex. I was told that 'income inequality existed' and forced to pay $700 a month to an ex with an Rn license whom just chooses to live off the State. No explanation was asked as to why she didn't work and NEVER paid support over 8 years. The Marital Master (Socialist) simply asked if my wife could work when she reviewed my financial affidavit showing me in debt and losing roughly a $1,000 a month and I DID act fiscally responsible. This is why I no longer live in NH but this kind of thought process and wealth redistribution to the irresponsible is the NEW RELIGION OF AMERICA. We had all better get used to it over the next few years.

2008 Apr 15 04:42 PM

[bowlmar:]

Socialism is a word which often crops up under the Bush administration. Socialization of risk, and privatization of reward is the true goal of the Neocon without a doubt. But perhaps we should view much of the current actions as Imperialism. We've lost countless liberties and rights over the last 7 years in the name of "terrorism", and we've been quite complacent about it.

Let's face it, Americans are forced to save for their own retirements using 401K and IRA instruments - this is a MASSIVE piggy bank of easy money for the financial industry to skim. We are witnessing the greatest engineered transfer of wealth in our history. I'm not sure it is Socialism, but I am sure it is yet another cynical and perverted twist of a Democracy.

2008 Apr 15 08:37 PM

[silver-bullet:]

Imagine, a day when where the only currency is gold and silver, interest rates will not affect its value. Inflation will be not exist. Since inflation is in effect a hidden tax on the common people, this means government will no longer pick the pockets of the masses. With less resources (might as well call call it stolen public money) government will have to contract.

This is such a heavenly idea - SMALLER GOVERNMENT. And this is all within our ability, to accumulate precious metal instead of fiat paper currency - especially the US$.

By the way, if you think about it - the US$ and the US government is one BIG BUBBLE, waiting to burst. The US$ has been abused but its creators, given the rights of 'World Reserve Currency'. I am beginning to see signs that this right is slowly being revoked as China, Middle East, India and Europe gradually divest from it.

Gold and Silver will out perform all fiat currencies on this planet because it can't be created via the printing press, or electronically via computer by adding zeros at the end.

Take your pick.

2008 Apr 16 02:06 AM

[Ames Tiedeman:]

This implosion will be regional. The west and east will be hit the hardest.

2008 Apr 16 07:21 AM

[pochovilla:]

The "staggering gross incompetence" of our government exacerbated by the current Republican Administration is at the core of the problem. With so many conflicts of interest it's amazing things are not worse. Washington needs statesman not politicians with ideology gone awry. The report card for FEMA, FDA, FAA, OSHA, EPA, SEC and most other government bureaucracies is embarrassing. There's too much big money controlling our legislation and loopholes are black holes. So how does the FED paddle up shits creek without a paddle? Bernanke is facing lousy choices. He has a 98+ % chance of being criticized no matter what he does. The FED can only try to fix a small part of a huge problem. As with sub-prime there are lots of suspects in the crime.

2008 Apr 16 09:50 AM

[Tim Plaehn:]

I thought this was an investment site, not politics. Take your "sky is falling" rantings elsewhere.

2008 Apr 16 01:55 PM

[sorgmot:]

Great article. The facts presented support my own observations about retail traffic flows and the number of empty store fronts I see locally. Everything has gone wrong for consumers. They have lost jobs, or lost hours at jobs. There is no reason to sink more money in houses because the owners can't sell for what is already sunk. Banks will not loan. Banks are loosing cash inflow on existing loans and mortgages. We are back to the 1930 with loss numbers that are 100 times bigger.

2008 Apr 16 03:50 PM

[kurt walter:]

You think we have socialist policies with Bush? If we get a democrat in the White House with a democrat majority in congress, you haven't seen nothing yet. Those democrats "feel your pain" and will tax and spend with more nanny state welfare projects than we have seen since the LBJ administration.

2008 Apr 16 04:52 PM

[Danny Newton:]

Hundreds of local governments are holding commercial property as economic development sites in Tennessee. Most are expected to be manufacturing sites but some counties and cities are holding loans of various quality on other types of commercial real estate. In the state of Tennessee. The area of land only held by 95 counties and their interior cities is a little over 100 square miles. This is a total off of the official state web site. The real area, including legitimate commercial property is probably close to 186 square miles. Most of this is purchased real estate that will be taken off of the tax rolls at 15K per acre and sold or for $3000 or given away. This is a phenomenon never seen in the last depression. The government seems to be drawing to itself the losers while the viable properties are still slow to circulate in the normal markets. The government response will have to be to increase taxes. Hundreds of local governments are holding commercial property as economic development sites in Tennessee. Most are expected to be manufacturing sites but some counties and cities are holding loans of various quality on other types of commercial real estate. In the state of Tennessee. The area of land only held by 95 counties and their interior cities is a little over 100 square miles. This is a total off of the official state web site. The real area, including legitimate commercial property is probably close to 186 square miles. Most of this is purchased real estate that will be taken off of the tax rolls at $15K per acre and sold or for $3000 or given away. This is a phenomenon never seen in the last depression. The government seems to be drawing to itself the losers while the viable properties are still slow to circulate in the normal markets. The government response will have to be to increase taxes.

2008 Apr 16 09:31 PM