You are here

Commercial Real Estate in Trouble

Adam R.'s picture

Posted January 20, 2009

The country is celebrating its new leadership today, but the storm clouds are gathering and the horizon looks grim.  Yes, the Dow dropped almost five percent today and the nasdaq was off even more.

While the trouble surrounding mortgages spent several years brewing, the next crisis could come much quicker.  Some people are suggesting that a decline in consumer spending, hastened by the lack of cash from home equity, will soon paralyze commercial real estate.  People are just not going to be shopping at the mall as much.  They are going to wear that sweater another season.  They are going to keep their old flat screen.  They are not going to go out and charge new drapes and some nice pillow cases.

These are the feelings that have led directly to bankruptcies at Bombay Company, Circuit City, and Linens & Things. That a lot of jobs, but it also a lot of rent at area malls.  Already, General Growth is on the edge of bankruptcy, following the resignation of members of its founding family, the Bucksbaums. Lightstone Group, owner of Extended Stay America and several malls with about 8 million square feet of retail space, is on equally difficult footing.

But the scary part is how fast things can turn.  As one observer noted, mortgage securitizations were made up of hundreds, or even thousands, of loans.  A single loan to a developer can be worth $25 million.  If one loan goes bad, then all of the subordinated positions in a commercial cdo can be wiped out.  Ouch.  So, the change could be coming soon, and no one is going to believe it.

The implications for neighborhoods and metropolitan areas are grim.  I don't think we really know what to expect when an entire mall shuts down.  I wonder about the implications for re-using space in exurbs.  I see some possibilities with some optimism, others (James Howard Kunstler) have a darker view.

At the very least, I think it is interesting to consider how a lower utility of suburban living might lead to demographic changes.  Jan Brueckner, a professor at UC-Irvine, suspects that without low transportation costs and safe neighborhoods, that poor households might end up congregating on the outer city.