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Sunday, April 13, 2008 12:23 PM

Commercial Real Estate Imploding

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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

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Mike "Mish" Shedlock
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