NO NEW LEASE ON TRILLIONS IN DEBT
By MARK DeCAMBRE
A trillion-dollar storm is gathering over the commercial real estate landscape that's threatening to add further pain to an already bruised US economy.
At the center of the worries is some $3.5 trillion in debt backed by everything from strip malls to offices and apartments across the nation -- the lion's share of which is badly underwater because this recession followed a five-year commercial property boom fueled by easy money and loose underwriting standards.
Now the owners of the less-than-full malls, apartment complexes and office buildings are succumbing to the worst economic collapse since the Great Depression -- because they can't refinance the debt.
The commercial debt securitization market is dead.
"Because there is no securitization the system cannot process the wave of maturities coming due," said Scott Latham, commercial property broker at Cushman & Wakefield.
"This is arguably the most important fact we're going to be dealing with. If there's no mortgage market that can feed the machine you're just not going to have deals," he said. "It's going to be years before we recover and even when that happens we're going to discover that we're in a new paradigm," Latham added.
About $1.4 trillion in real estate debt is set to mature over the next four years, with some $204 billion coming due this year alone.
Most of that debt won't be able to be refinanced or restructured because lending standards have tightened and commercial real estate values have cratered since last year, according to Deutsche Bank analyst Richard Parkus.
The debt behind the commercial real estate boom, commercial mortgage-backed securities, or CMBS, entails pooling together commercial mortgages in apartment buildings, shopping malls or trophy offices in different locations, packaging them into bonds and selling them to investors.
CMBS issuance reached its peak with $230 billion transactions completed in 2007. Last year, as the market was dying, a relatively anemic $12 billion in activity was seen, according to industry newsletter Commercial Mortgage Alert.
The last time the markets saw a tsunami like this one was in the late 1980s during the savings and loan crisis, when builders overwhelmed the markets with commercial supply that went vacant for years.
However, this commercial real estate crisis, fueled primarily by developers and property investors getting easy access to relatively cheap loans, may be even worse than what's come before. That's especially the case since Average Joes and Janes are by extension huge landlords via pensions, endowments and mutual funds -- which have big commercial property exposure over the past few years.
Broadly speaking, commercial real estate values are off by as much as 40 or 50 percent by some estimates.
C&W's Latham also points out that some loan agreements with bank lenders stipulate that properties have to be rented at a certain dollar amount or run into technical default.
"Many of these loans don't live long enough [to refinance]," Parkus told The Post. The research analyst plans on submitting a more comprehensive commercial real estate report as a follow-up to his popular report next week that's even grimmer than his original.
According to C&W, Manhattan vacancies jumped 20 percent in the first quarter from three months earlier, with Midtown seeing a 24 percent vacancy rate.
"There's going to be a lot of pain," Anton commented. Here is how the commercial real estate crunch is affecting three companies:
* Broadway Partners
Take the case of Scott Lawlor, who is struggling to keep a $14 billion assemblage of the nation's choicest properties he owns via real estate fund Broadway Partners from falling into the hands of his lenders -- or worse, having to file for bankruptcy.
Recently, a consortium of lenders foreclosed on Lawlor's John Hancock Tower -- a trophy Boston office building. The $660 million the building fetched at auctioned when sold by Lawlor's creditors represented half the amount Lawlor's fund paid for it in 2006.
It serves as a haunting experience for the son of a Queens cab driver who in rapid-fire fashion in less than five years grew his firm from a few small office buildings in Philadelphia and New York into a billion-dollar empire spanning the nation. He did it on the back of leverage.
As it stands, Lawlor is fighting to restructure much of the debt he borrowed to fund his buying spree in the hopes of weathering the real estate storm. Sources told The Post that the Broadway CEO is currently in talks to recast a block of offices acquired from real estate fund Beacon Capital Partners and financed by the defunct Lehman Brothers.
Privately, Lawlor has told peers that he believes that he may lose one or two more properties to foreclosure but expects to maintain the bulk of his multi-million square foot office portfolio. A spokesman for Broadway declined comment.
* Tishman Speyer
Sources tell The Post that the sprawling 80-acre Stuyvesant Town-Peter Cooper Village apartment complex that Tishman Speyer acquired with its partners three years ago for $5.4 billion may end up in lenders' hands after cash reserves for the residential complex run dry.
And that's not the only asset on which the company is feeling the pinch. Tishman bought for about $21 billion on leverage the real estate investment trust Archstone-Smith at the height of the market.
Tishman's Archstone purchase loaded the REIT up with massive debts, and lenders are believed to have been forced to place about $1 billion more into the company in order to keep it afloat.
Tishman officials have argued that they're not taking as big a hit on its investments as one might believe because it never put that much equity at risk. Tishman put about $250 million into its investment in Stuy-Town and about $112 million in Archstone, sources said. A spokesman for Tishman declined to comment.
* General Growth Properties
So far the biggest commercial real estate blow up has been that of REIT General Growth Properties Trust, the second-biggest owner of shopping malls throughout the US. It filed for bankruptcy protection last month.
Like many of the commercial real estate investors, GGP ballooned in size by using leverage to scoop up a raft of malls in the early-2000s as choice, rarely sold mall jewels that hit the market.
GGP used billions in CMBS debt to fund its acQuisitions, but as retailers got slammed and the economy spiraled into recession so it couldn't keep up with its payments.
In fact, GGP's collapse into bankruptcy is testing the bounds of the laws that govern which debtholders get what when companies fall into Chapter 11.
As a holding company, GGP has filed for bankRuptcy, but it has many so-called special purpose entities that represent the individual malls it owns under the GGP umbrella.
Debtholders of those CMBS bonds had always thought that in a bankruptcy their ownership would be insulated from getting whacked -- but now they're not so sure.
So far instances like GGP, Tishman and Broadway have been treated as one-offs but there are already signs that a wave of such problem property situations is waiting in the wings.
In total, more than 4,500 properties are on the brink of default, representing some $95 billion in assets in the US, according to Real Capital Analytics.
At this point, it's hard to determine how the commercial real estate problem will resolve itself but it's expected that banks may suffer losses of $200 billion with regional banks being slammed the worst.
Case 1
Broadway Partners
$14 billion in property under management
Office assets +17 million sq. ft.
CEO: Scott Lawlor
Speed bump: Bought Boston's John Hancock Tower for $1.3B in 2006 near market peak; forced sale for $660K last month.
Case 2
General Growth Properties
Over 200 US malls with 200 million sq. ft. in retail space.
Chairman: John Bucksbaum
Speed bump: Couldn't pay debt due on 2004 purchase of Rouse Co. for $12 billion - and couldn't refinance it.
Case 3
Tishman Speyer
92,000 apartments with 115 million sq. ft. rental properties
Chairman: Robert Tishman
Speed bump: Bought Stuy-Town for $5.2B in 2006; operating cash will only last to 2010; unable to refinance.
By Steven C. Johnson - Analysis
NEW YORK (Reuters) - It was an awful week for the dollar, which sank to its lowest level of the year last week, and with markets now focused on a trillion-dollar-plus U.S. deficit, the greenback's sharp slide is not over yet.
Unlike in the recent past, when investors terrified of a global financial meltdown sought safety in Treasury bills and other dollar assets, the greenback is now being driven by its own fundamentals, and all of them look fairly bleak.
Massive spending and unorthodox monetary policies over the last year have the United States looking down the barrel of a $1.75 trillion deficit. That reality took on a new relevance last week when Standard & Poor's said it may cut Britain's AAA credit rating because of soaring public debt, prompting fears that the United States could be next.
Persistently sluggish U.S. growth and rising unemployment also suggest interest rates may be at zero for some time yet.
That has started to frighten foreign investors away from U.S. assets altogether: U.S. Treasury yields spiked to six-month highs this week and the dollar has lost some 10 percent against a basket of currencies since March .DXY.
"The charts suggest the dollar is oversold, but people are starting to ask existential questions about the United States," said T.J. Marta, founder and chief strategist at Marta on the Markets in Scotch Plains, New Jersey.
"The fear is about how much the government can do -- it's underwriting the banking system, the insurance industry, the auto sector. At some point, people say, 'Oh my God, is the whole thing going to implode?'"
The government has said it will need to borrow $2 trillion, or 14 percent of the country's total economic output, in 2009 alone. It has already spent most of a $700 billion rescue plan to prop up the banking system and juiced up the economy with a $787 billion fiscal stimulus plan.
The Federal Reserve, meanwhile, is committed to buying $1.5 trillion in mortgage and agency debt issued by Fannie Mae and Freddie Mac and is making direct purchases of U.S. Treasury bonds to the tune of $300 billion.
And it won't get any easier. The dollar could face more selling if Treasury struggles to attract many takers for $101 billion of fresh government debt this week.
After that, Treasury Secretary Timothy Geithner heads to China, the biggest buyer of U.S. government debt, where he will have to reassure his hosts that the United States will be able to ensure the value of the dollar even as its deficits balloon.
It all adds up to more gray skies for the dollar, with near-term rallies seen as excuses for renewed selling that could send the euro, which broke $1.40 last week for the first time since January, toward $1.45 and sterling toward $1.60.
"There are half a dozen reasons to sell the dollar. Until we get an event to alter the course of events, traders will stay on the bandwagon," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.
UNWINDING SAFE-HAVEN FLOWS
The dollar decline isn't new, of course. The value of the currency began eroding weeks ago as increased optimism about the global financial sector meant investors were no longer drawn to buying it as a safe-haven.
Instead, they began searching for better returns in global stock markets or by purchasing higher-yielding currencies such as the Australian dollar or Brazilian real.
Steven Englander, a strategist at Barclays Capital in New York, said the safe-haven bid that boosted the dollar for months has only begun to unwind, suggesting more selling.
What's more, financial sector conditions have improved to the point where investors no longer fear that another major bank failure such as the one that toppled Lehman Brothers last year lurks around the corner.
That further dulls the need for a safe-haven and frees investors to consider the dollar impact of the massive amounts of money U.S. authorities have pumped into the banking system.
That's worrisome since authorities in Canada, Australia and the euro zone have embraced far more conservative policies that are less likely to stoke deficits or inflation.
"When investors were petrified about the potential downside, that wasn't a big issue," he said. "Now it's hard to back away from the longer-term concerns."
Some analysts say the dollar will rebound later this year as U.S. policies start to help the economy recover, allowing the Federal Reserve to raise interest rates before other central banks and increasing the dollar's allure.
Indeed, if the euro and yen get much stronger, Marta said, Germany and Japan may increase Treasury purchases, which "would have a salutary effect."
But for now, the bears are in control, with all the major market themes translating into dollar weakness.
"If the news stream is good, we are told investors are less risk averse and do not need the dollar's security," said Brown Brothers Harriman currency strategist Marc Chandler. "If the news stream is poor, we are told the U.S. is in horrific shape and the budget deficit will swell even more. It is difficult to see what will break this psychology in the coming weeks."
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