skyscrapers and shopping malls next to Fall
One bad news for banks ending, another begins. This is really beginning to make me puke.
Defaulting Commercial Properties Hit Banks on Vacancy-Rate Rise http://www.bloomberg.com/apps/news?pid=20601203&sid=aR72TKlxCQ7A
By Ari Levy and Daniel Taub
March 23 (Bloomberg) -- U.S. banks, battered by record losses from the worst housing slump since the Great Depression, now must weather increasing loan delinquencies from owners of skyscrapers and shopping malls.
The country’s 10 biggest banks have $327.6 billion in commercial mortgages, which face a wave of defaults as office vacancies grow and retailers and casinos go bankrupt. A projected tripling in the default rate would result in losses of about 7 percent of total unpaid balances, according to estimates from analysts at research firm Reis Inc.
Commercial property prices are down almost 20 percent in the past year, and with the global recession worsening, there’s “significant stress” in the market, said William Schwartz, a credit analyst at DBRS Inc. in New York. Moody’s Investors Service is reviewing the financial strength ratings of 23 regional lenders, as “these losses are likely to meaningfully weaken the capital position of many banks in 2009,” said Managing Director Robert Young in New York.
Bank of Hawaii Corp., City National Corp., Comerica Inc. and Sovereign Bancorp Inc. were among the companies put on Moody’s list of lenders with a “negative outlook” on March 12, partly because of their “risk concentrations” in the commercial market. Wells Fargo & Co. and Bank of America Corp. account for about half of commercial mortgages owned by the 10 largest banks, company reports show.
With U.S. unemployment at 8.1 percent, the highest in a quarter-century, and more than 100,000 people and companies filing for bankruptcy in February, commercial property defaults are poised to rise. That may lift the vacancy rate at office buildings to 16.7 percent this year from 14.5 percent at the end of 2008, analysts at New York-based Reis estimate.
“In the office market, you’re starting to see signs of mammoth job losses,” said Mark Scott, senior vice president of NorthMarq Capital LLC, a commercial real estate brokerage and property-management company in Parsippany, New Jersey. “And, as people aren’t buying as many goods, they’re not shipping as many goods, so we have stress in the industrial market.”
While the housing boom of the past decade drove banks to issue tens of thousands of subprime and option adjustable-rate residential loans, lenders also made cheap credit available to builders and buyers of high-rise office buildings, strip malls and apartment complexes.
The number of retail properties seized by banks or in some state of default rose to 464 this month, more than triple the number on Dec. 18, with a total value of $7 billion, according to Jessica Ruderman, a research analyst at Real Capital Analytics Inc. in New York. That means banks aren’t being repaid and are stuck owning properties that have plunged in value.
Wachovia Corp., now owned by San Francisco-based Wells Fargo, foreclosed on the 46-store Bridgewater Falls mall in Hamilton, Ohio, in February. The borrower, Indianapolis-based Premier Properties USA Inc., defaulted on an $80 million loan from Wachovia at the peak of the real estate bubble. Wachovia sold the property to itself for $33 million, or 59 percent less than the original loan, after no higher bids emerged at an auction earlier this month.
At the Bridgewater Falls complex about 30 miles north of Cincinnati, a Target Corp. store was the first to open about four years ago, followed by companies including J.C. Penney Co., Best Buy Co. and PetSmart Inc., said Julie Krause, the mall’s marketing manager. Premier Properties, the site’s former owner, filed for bankruptcy last April. Krause said the foreclosure was a reflection of the borrower’s struggles, not retail sales.
Susan Stanley, a spokeswoman at Wells Fargo, which has $103 billion of commercial mortgages, more than any U.S. bank, declined to comment on the property or the company’s loans.
Wells Fargo Chairman Richard Kovacevich said earlier this month that he doesn’t expect commercial real estate to cause a surge in losses for diversified banks because underwriting in the past decade was more disciplined than in earlier periods. He did acknowledge that writedowns lie ahead.
Wells Fargo said in its annual report that $594 million of commercial mortgages, including those inherited from Wachovia, were no longer collecting interest, or about 0.6 percent of its loans. That compares with $128 million in 2007. The bank increased its allowance for commercial mortgage credit losses to $1.01 billion at the end of 2008, or about 1 percent of the loans, from $288 million, or 0.8 percent, a year earlier.
“The only thing we are facing today in commercial real estate is the fact that we have a weakening economy,” Kovacevich, 65, said in a March 13 speech at Stanford University in Palo Alto, California. “In a weakening economy, you have higher unemployment, you have fewer people who need to occupy office buildings, you have fewer retailers who need to exist.”
Among the retailers that couldn’t find a way to survive the recession is Circuit City Stores Inc., the electronics chain that went bankrupt last year as sales plunged. It closed its 567 U.S. stores this year after negotiations with prospective buyers failed. Retailers Mervyn’s LLC and Linens ‘n Things Inc., which had more than 750 stores combined, liquidated late last year.
New York-based Citigroup Inc. foreclosed last week on the Oakwood Shopping Center in Gretna, Louisiana, after its owner, General Growth Properties Inc., missed a March 16 deadline to pay a $95 million loan. Citicorp North America owns $27.5 million of the loan, according to the foreclosure filing.
Last month Citigroup took back Fuller Lofts, a planned redevelopment and expansion of a 1920s Los Angeles industrial building that was to be turned into 104 housing units. The tenant was a non-profit called Livable Places.
‘Downturn Proved Fatal’
“We began construction as speculation and frenzied demand drove up construction costs, and we started marketing homes as the turmoil in financial and real estate markets began,” Livable Places said in an undated message on its Web site. “The impact on the southern California economy has been dire, and for Livable Places, the economic downturn has proved fatal.”
Matt Ehrhard, Fuller’s construction manager for four months in 2007, said work began at the same time the housing slide did.
“Eventually the funds just ran out, and they couldn’t get any further with the project,” Ehrhard said in an interview. “I’ve never been involved with anything that’s been as derailed as much as this one.”
Citigroup is less exposed to commercial mortgages than its biggest competitors. The bank has $6.6 billion, or 0.9 percent of its loans, in real estate, compared with 12 percent at Wells Fargo, 7.5 percent at New York-based JPMorgan Chase & Co. and 6.9 percent at Bank of America in Charlotte, North Carolina, according to company reports.
Danielle Romero-Apsilos, a spokeswoman for Citigroup, declined to comment about the Oakwood mall, Fuller Lofts or its other holdings.
Most troubled commercial properties have loans that are either syndicated or packaged into securities and sold to investors, and aren’t owned by a single lender. One Riverwalk Place, an 18-story office building in San Antonio, defaulted this year, as did Riviera Holdings Corp., a Las Vegas-based casino owner. Neither loan is owned by a single lender.
Banks, like real estate developers, sold off most of the riskiest debt, said Dan Fasulo, a London-based managing director at Real Capital Analytics.
“They keep the good deals for themselves, and they do the riskier, shadier stuff with a partner,” Fasulo said. “What are you going to do with the bad stuff? You’re going to try to syndicate it privately.”
While the highest delinquency rates may be in the areas that got most overheated, such as parts of Florida and California, the increase in job cuts will lead to vacancies in areas once thought safe, said Walter Mix, managing director of the Secura Group of LECG, a consulting firm in Los Angeles.
“Occupancies will continue to decline for at least the next couple of years,” said Mix, a former commissioner of the California Department of Financial Institutions. “For the industry as a whole and for certain banks -- large, regional and community -- you’ll see more of an impact.”
To contact the reporters on this story: Ari Levy in San Francisco at firstname.lastname@example.org; Daniel Taub in Los Angeles at email@example.com. Last Updated: March 22, 2009 20:01 EDT