The frenzy of residential foreclosures is beginning to spread to another segment of the real estate market: commercial real estate.
Owners of commercial real estate — shopping centers, office buildings and industrial space — are seeing many of the same problems afflicting homeowners. Property values are caught in a downward spiral, and a tight credit market makes refinancing difficult or impossible.
Add to that rising vacancy rates because of the recession, and you have a formula for a new real estate crisis.
Few Signs Of Trouble
Strolling around downtown Miami, it certainly does not look like commercial real estate is in trouble. There are three big office buildings under construction, including a 47-story tower called Met 2.
In two years, when the entire Met complex is completed, it will include condos, a hotel and a 120,000-square-foot retail center. Tim Weller, of the MDM Development Group, calls it a shopping and entertainment destination. He says the pedestrian-friendly project in the heart of downtown Miami creates open plazas and outdoor seating.
"It has an atrium four stories high, it's all open, a lot of glass — so it's very visible," Weller says. "So we think it will be a real draw here."
Over the past two years in Miami, more than 25,000 new condominium units have come on the market. Gleaming new condo towers have reshaped the city's skyline, but sales have been slow and foreclosures are common.
With a glut in the condo market, some developers converted their projects to office towers. Next year, when Met 2 is completed, nearly 2 million square feet of new office space will be coming on the market.
"That is way more square footage than can ever be absorbed at one time, even in a good economy, in good times," says Jonathan Kingsley, managing director of Grubb & Ellis Co., a commercial real estate company.
The development of new office buildings downtown comes as companies in Miami and around the country are making cutbacks and closing offices. In this economic environment, anchor tenants for new buildings are hard to come by. MDM suffered a blow recently when Whole Foods Market announced it was pulling out of the Met project.
Kingsley says the declining demand and the oversupply of office space suggest this will be a tough year for commercial real estate.
"We project that in the next three to four quarters, we could see vacancies go from what is now an 8 to 10 percent threshold, to 14 to 16 percent," Kingsley says.
But in every crisis, there is also opportunity.
Michael Fay recently set up a new distressed property services group at Colliers Abood Wood-Fay, a real estate company in Miami. Fay got started in the business in the 1980s, helping the Resolution Trust Co. and other government agencies liquidate property during the savings and loan crisis. He sees many of the same opportunities emerging in this downturn.
With declining property values — plus rising vacancy rates — Fay says commercial landlords face tough decisions.
"Now that the music has stopped, there are a lot of people — banks, investors, lenders — [who] are caught with this way-overvalued property that has got highly leveraged land and it's gone into foreclosure," Fay says. "And now they're trying to sell it. And it's going for literally 40 cents, 50 cents, 30 cents on the dollar in some areas."
As bad as that is, it's not the biggest problem facing commercial real estate. What many commercial landlords worry about is the same thing bedeviling homeowners, businessmen and the economy at large: the lack of available credit.
Banks and other institutions that back commercial real estate are calling on Congress to use some of the Treasury Department's Troubled Asset Relief Program money to help restart an important part of the system: commercial mortgage-backed securities.
These are close relatives of the mortgage-backed securities that are blamed in part for the housing meltdown.
J. Christopher Hoeffel, president of the Commercial Mortgage Securities Association, says the commercial securities are more highly regulated than their residential counterparts and are vital to the industry, accounting for more than half of all financing before the downturn.
Something needs to be done soon, Hoeffel says, because many commercial property owners will be in dire need of refinancing.
"The biggest concern is balloon maturities — i.e., the loans are coming due, and there's no lending to take out the loans and replace them with new loans," Hoeffel says.
An industry group, the Real Estate Roundtable, estimates that $400 billion in commercial mortgages will come due within the next several months. Unless there is government action to revitalize the commercial mortgage market, the group warns of severe consequences for "investors, workers, local governments and the economy as a whole."