Many months ago, I had a debate with an acquaintance who argued that there were major differences between the housing market and the commercial real estate market (CRE). In his opinion, the fundamentals of the latter meant the sector was somewhat immune to the many woes that have plagued the residential property sector.
While there had been some speculatiion in commercial property, he argued, most participants are seasoned operators who take a number of key financial and economic considerations into account before they develop and acquire properties.
My view was that cheap money, leverage and hubris had undermined the structural underpinnings of virtually all asset markets, including commercial property. While he might be right about the degree to which any downturn in the market for malls, office buildings, and other commercial properties would lag the decline in housing, it will nonetheless be substantial-- well into double-digits, in my opinion.
In "Commercial-Property Players Find Their Pressures Growing," the Wall Street Journal details what seem to be the early signs of serious trouble ahead.
As Crisis Spreads, Market Seizes Up; Capital Preservation
For the commercial-real-estate players that were in hot water before the capital-markets crisis of the past two weeks, the temperature is rising.
Retail giant Centro Properties Group, New York developer Macklowe Properties, office-building investor Broadway Real Estate Partners LLC and others are now facing an even rougher ride in the wake of Lehman Brothers Holdings Inc.'s bankruptcy, the collapse of American International Group Inc. and the buyout of Merrill Lynch & Co. by Bank of America Corp.
After these and other market crises, cash-flow projections for properties are being scaled back in anticipation of a greater economic slowdown. The sales market -- long considered the last hope of many distressed players -- has virtually ground to a halt.
Even creditors that were willing to make real-estate loans before the upheaval are pulling back, having witnessed the spectacle of some of the biggest names in finance and banking vanishing in a period of days.
"In this kind of environment you are not looking to put capital to work," says Lisa Pendergast, managing director of RBS Greenwich Capital. "Most banks and brokerages are in capital-preservation mode."
The demise of Lehman and other events are pushing buyers out of the market or emboldening them to demand lower prices. For example, shopping-center giant Centro Properties Group, which faces a Sept. 30 deadline to pay off $2.3 billion in debt, had a pending deal to sell 29 U.S. properties to DRA Advisors for $714 million.
