Friday, April 2, 2010

The Coming Commercial Real Estate Crash

You may have noticed a lot of empty store fronts in your neighborhood strip malls. If those empty spaces give you any kind of uneasy pause or sense of concern, your instincts are sound. Something terrible is happening in the quiet corners of the nation's economy.

Commercial Real Estate is about to become big news. Very big news.

Lets look at a news article that appeared recently in the Seattle Times.

See: Columbia Center misses mortgage payment

The Columbia Center is Seattle's tallest skyscraper. It is the city's flagship office tower. A tall slender structure of black glass and steel, it rises high above all of Seattle's other offices buildings.

And nearly half of it is now available for rent.

Bottom line!: The new owners of the building are totally screwed.

When Beacon bought the Columbia Center in April 2007 it was 89 percent leased. The firm paid $621 million, according to county records, and borrowed a total of $480 million to help pay for the tower.

Its assessed value now is $380 million.

"There are many buildings in a similar position where the loan is greater than the value of the building," said Craig Kinzer of Seattle-based Kinzer Real Estate Services.

That is a world of butt-hurt.

That is also only one of many of the large office towers in this city.

The office towers are not alone in their problems. Residential rents in the Seattle area are at historic lows.

See: Renters, rejoice: Apartments are cheap and the iPod is free

After peaking in 2006 and 2007, rents in King, Snohomish and Pierce counties tanked over the course of last year by nearly 4 percent, according to Scott. He expects rents will continue to plummet this year by 5 percent, and again in 2011, but less dramatically.

In Seattle, property managers say that trend has been more pronounced, with some rents dropping as much as 15 to 20 percent last year. In general, higher-priced units have had biggest rent reductions. Bart Flora, co-owner of Cornell & Associates, which manages 6,500 properties in the city, said some, in-city, one-bedroom apartment now rent for $800 to $850, instead of roughly $1,000 two years ago.

"It's the steepest drop I've ever encountered in 25 years, certainly in my career," said Flora. He added that he believed the market - at least in Seattle - appears to have hit bottom and is stabilizing.

(Stablizing? Not even close buddy. There is a whole lot more bottom to hit.)

Now think about what all of that means, not only to the landlords of both the office towers and the apartment buildings, but also about what it means to the municipal coffers. When there is no money to tax . . .

Seattle is screwed.

And its not alone.

Look around.

What do you see happening in your city?

See: Half of Commercial Mortgages to Be Underwater: Warren

By the end of 2010, about half of all commercial real estate mortgages will be underwater, said Elizabeth Warren, chairperson of the TARP Congressional Oversight Panel, in a wide-ranging interview on Monday.

“They are [mostly] concentrated in the mid-sized banks,” Warren told CNBC. “We now have 2,988 banks—mostly midsized, that have these dangerous concentrations in commercial real estate lending."

As a result, the economy will face another “very serious problem” that will have to be resolved over the next three years, she said, adding that things are unlikely to return to normalcy in 2010.

Soon, the quiet corners of our economy are going to come screaming down around all of our ears.

HT: 3Wood at CC

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