Commercial Real Estate May Be the Next to Fall

On November 19, bonds and stocks backed by commercial real estate loans plummeted on investors’ fears the struggling U.S. economy might lead to a wave of defaults.

Big real estate companies suffered big losses: shares of Simon Property Group, the top U.S. mall operator, declined 13%; Boston Properties Inc., owner of skyscrapers and office buildings in key U.S. markets, fell 12.1%.

General Growth Properties Inc., which owns more than 200 mall properties throughout the United States, is teetering on the brink of annihilation. If the flailing company can’t come up with the $958 million of its debt that is now due, and the $3.07 billion due next year, it will have to file for bankruptcy protection.

“Ghost malls” may become a common sight around the country, with major mall developers and big-name retail chains like Linens ‘n Things and Circuit City going broke and others, such as Starbucks, closing hundreds of stores nationwide. Small businesses are even worse off as shoppers tighten their belts.

A recent Newsweek article quipped that it would “take some kind of sorcery to keep the current mix of store closings, skeletal inventories, hard-to-find sales staff and anxious consumers from turning the yuletide shopping season of 2008 into a seriously cranky Christmas. Even Santas have been getting pink-slipped.”

None of what’s happening surprises Andy Miller, a consummate real estate entrepreneur and friend of Doug Casey’s, who presented his outlook on the commercial real estate market in the September edition of The Casey Report. Here’s what he had to say on a few topics:

Miller on retail shopping centers:

“Retail are the most exposed product type. For example, we have a grocery-anchored shopping center in Phoenix that’s about 94% occupied. We’ve been trying to sell it for the last nine months. We’ve had it under contract probably four times. Each time, it’s fallen through because the buyers were unable to find a lender. The lack of liquidity is particularly acute in the commercial markets.

“Most commercial mortgages that were written over the last 10 years for most product types, except apartments, were done by conduits, and they were done by asset-backed finance securitizations, CDOs, etc. The overwhelming number of those conduits are now either out of the market or shut down. There’s going to be a tremendous upheaval in the commercial market relative to the fact that there’s almost no conduit money available anymore.”

On office space:

“The office market, of course, is eroding. While I expect the central business districts around the 20 top cities in the country to probably be relatively stable in terms of office occupancy, I think the suburban markets are going to get creamed.”

On warehouses:

“Warehouses are bad. They’re very flat. Users are consolidating; they’re not expanding.”

On hotels:

“I’d also be wary of hotels. The hotel business is proliferating right now, in a way that I’ve never seen. There are so many new hotels being built right now nationally that there’s no way, even in good times, that I think they could sustain occupancy. A lot of these hotels now have created new flags and they’re putting them in multiple locations in most big cities. So there’s been a tremendous proliferation of hotels and, with high air fares and high gas costs, there’s no question that that’s going to be a bad place to be.”

On the real estate bubble:

“There is no historical comparison to the situation today. Not even the Great Depression was like this. I believe we’ve just lived through the greatest expansion of capital in the history of planet Earth, in the history of mankind.

“And this happened really all over about 12 or 13 years, this gigantic, dynamic expansion of money. There is no precedent for this. One truth about cycles is that the downward part of the cycle is usually quicker and more painful than the upward swing. We didn’t get into this thing overnight. It took many years, and we are not going to get out of it overnight. It’s going to take many years to unwind.”

Waiting for the other shoe to drop is an uncomfortable position to be in. Thankfully, there are a number of lifelines we as investors can grab on to, to avoid getting sucked into the whirlpool of declining asset values and a declining dollar…and we should take every chance we get to use them.


Olivier Garret
for Markets and Money

Leave a Reply

3 Comments on "Commercial Real Estate May Be the Next to Fall"

Notify of
Sort by:   newest | oldest | most voted
Mall Burned
I have been saying this for the last 4 years as having run a chain of small businesses in the major malls most survive on wages as income and buying a job as the ROI on the investment and depreciation over 5 years on fit out doesnt work finacially. You can do better as a bank clerk (until recently) on 50K PA why be in business if there is no profit for the 24/7 committment. Many were trapped trying to amortise their capital over multiple lease periods, but surviving. This model for lessee serfdom is not sustainable and subsequently the… Read more »
Jon Bain

The cause of all of this in one short phrase:

A corrupt legal system.

Greg Atkinson
Nothing to get too worked up about regarding commercial real estate. I suspect the “bears” will drag out the usual downturn stories from bank woes to the little ice cream shop that closed after 25 years. The fact is shops are always closing down in malls but of course during a recession a few more will fail, and we will take more notice of these failings. (and the good old media will highlight these failures) The Starbucks situation has little to do with the credit crisis. Starbacks over expanded and grew too big too fast…it happens. It also suffered from… Read more »
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to