General Growth’s failure will not be the last
Today's Financial News - Posted April 16, 2009
The commercial real estate industry has traditionally been a lagging indicator. If that remains true, we could be in for much more pain.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): It will go down as the eleventh largest bankruptcy in nearly thirty years. Bigger than Delta Airlines. Bigger than Adelphia’s failure. It is only a hair smaller than the losses when Global Crossing went belly up.
When my wife and I walked into a mall this weekend, I pointed to a sign that said General Growth Properties (NYSE:GGP) owns the property.
“Not for long,” I said. The problems facing the nation’s second-largest mall owner were obvious, just by studying this single property. Stores were empty. Competitors were building all around it. And few shoppers had bags in their hands.
It is no surprise to hear the company has filed for Chapter 11 bankruptcy protection this morning. With few lenders willing to hand the company the concessions it needs to stay afloat, court-led protection was its last resort.
Now, the company must reorganize its $29 billion or so in assets to cover its $27 billion in liabilities.
Mall for sale
The news could not have come at a worst time for the nation’s commercial real estate industry. If you thought the pain in the home market was bad, take a look at this mega-dollar sector.
Just this morning, JP Morgan’s (NYSE:JPM) CEO, Jamie Dimon, told the world to brace itself for “rapidly rising” commercial real estate losses.
According to Deutsche Bank, commercial property values are down by 35% to 45%, which means many of the $154 billion in mortgages due between now and 2012 will not be eligible for critical refinancing.
One analyst at the bank said, “”Real estate fundamentals are softening dramatically. Over the next 12 to 18 months, we expect to see pretty significant deterioration.”
In other words, expect plenty more tales similar to General Growth’s woes. Consider it Round 2 of the real estate crisis.
Commercial real estate has traditionally been a lagging indicator. As workers cut headcounts, less office space is rented. And as those laid-off workers cut their spending, retailers close shop and abandon their stores. We are merely seeing the beginning of the industry’s pain.
What does this all mean for investors? It should be a clue to stay away. Keep your exposure to commercial real estate to an absolute minimum.
Simon Property Group (NYSE:SPG), one of General Growth’s largest competitors, is holding fairly steady today, even with news of an intra-industry bankruptcy.
That does not mean shares of the retail-REIT will climb out of this mess. Shares of Simon have plunged from over $100 to around $40 during this financial fiasco. As the commercial sector deteriorates over the next 12 to 18 months, its shares are likely to get even cheaper.
Do not get suckered into believing a near-term economic rebound will solve the industry’s problems. It could be years before the commercial real estate industry catches up with its peers.
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