Mortgage mess impacting commercial real estate lending
Commercial real estate developers are no longer immune to the credit crunch hitting residential real estate owners and developers, according to today’s Wall Street Journal. Yesterday invisible proof of the problem, a Las Vegas casino developer, Bruce Eichner, defaulted on a $750 million loan from Deutsche Bank because he was not able to refinance the debt. It’s not the first time he’s been caught up in a credit crunch. The Journal reports he lost several projects in New York City during its real estate downturn in the early 1990s.
The Journal also points out he’s not the only one having trouble getting refinancing. Other commercial developers in trouble according to the Journal include:
A major Australian shopping mall developer, one of the largest owners of shopping centers in the U.S., has been unable to refinance $3.4 billion in short-term debt.
New York developer Harry Macklowe, who bought office buildings at the top of the commercial real estate market, can’t refinance $7 billion in debt that’s due in February. He’s trying to sell his General Motors Building in midtown Manhattan to come up with cash.
Investment bankers weren’t only free with their cash for subprime home buyers, they also made it easier for developers to get commercial loans. Now that there are huge write-downs on Wall Street, these same bankers can’t find the money to refinance commercial real-estate loans. In fact, Moody’s Investors Service warned last week that the default rate for the construction and building industry could reach 12% this year. It also predicted a 6% default rate in the hotel, gaming and leisure industries.
As the news keeps getting worse and worse, alarms bells keeping going off in my head. While the Great Depression of 1929 was created by the easy credit available for stock purchases that fueled the stock market bubble of the 1920s, will the easy credit available for real estate that fueled the current real estate bubble that just burst lead us into the next Great Depression?
I surely hope not, but I’m not sure there is any way to stop it. If it is possible, Ben Bernanke, who spent his academic career studying the Great Depression, might be just the right white knight to do it. Let’s hope so. (You can read more about Bernanke’s research regarding the Great Depression in a preview to Sunday’s New York Times magazine.)