Real Deals

Commerical real estate debt clouds future

Staff WriterApril 9, 2009 

Wakefield Commons looks like almost any other shopping center in this growing region. People who live and work nearby --the ones who rely on the center for groceries, a quick bite or sometimes a movie --hustle in and out, around the clock.

Few, if any, shops are empty, a rarity in these penny-pinching times, which is part of the reason competing landlords are keeping an eye on the 160,000-square foot center in North Raleigh.

The other part: Its owner, half a world away, is trying to escape a rolling boulder of debt in an era of constrained lending.

Centro Properties Group of Melbourne, Australia, needs to pay down at least $2.6 billion in debts maturing by the end of 2011. And if credit doesn't start flowing soon, the balance could be a burden not to just Centro, but to competing landlords.

Lenders, who have tightened up in the past year and a half as the economy soured, have made it harder for many landlords to refinance debt. The lack of debt financing is also sidelining many buyers.

So Centro, to pay back its lenders on time, has been forced to unload some of the 650 properties it owns around the country at bargain prices. And if Wakefield were to be sold under pressure, it could weigh on the values of other nearby retail properties.

This financial fix --healthy property, ailing owner --illustrates how the global credit crisis is turning landlords into casualties even in some of the country's fastest-growing regions. And Centro is just one landlord.

In the middle of this decade, rapids of easy money flowed through commercial real estate, forcing up property values, rents and expectations for more of the same. Now landlords, already facing softening values, are bracing for a severe correction as the debts that fueled the boom come due.

At least $814 billion in commercial and multifamily real estate debt is set to mature in this country over the next three years, reports Foresight Analytics of Oakland, Calif.

"This is setting the stage for a likely financing shortfall, leading to increased distress in the commercial real estate debt market and putting downward pressure on values," Foresight analysts wrote last month.

Nationally, the value of distressed commercial properties has at least doubled to $49.2 billion since the end of last year, according to Real Capital Analytics of New York, which defines a distressed asset as a property with a reported default, foreclosure, bankruptcy filing or lien.

The Triangle represents a mere fraction, accounting for the second-fewest troubled assets, next to the Washington, D.C., metropolitan area. Real Capital lists only a few distressed commercial properties in this area, including Wakefield Commons and several other Centro properties.

But the region --the second-largest in a state whose investors owe $8.8 billion in commercial real estate debt by the end of 2011 -- is sure to see more.

Already, bankruptcies of residential developers and builders have left chunks of unsold homes and undeveloped lots up for grabs throughout the Triangle:

In November, Royal Bank America of Narberth, Pa., paid $4 million for a block of unsold condominiums and land at Meadow Wood Park in Raleigh after Town & County Developers of Raleigh defaulted.

Last month, SunTrust Banks of Atlanta paid $32.24 million for unsold and undeveloped portions of Hasentree, a massive golf community in northern Wake County. The developer there owed about $39 million.

And more could be coming as builders such as Den-Mark Construction, Anderson Homes and St. Lawrence Homes wade through bankruptcy.

The expected wave of offices, shopping centers, warehouses and commercial-development sites has yet to come ashore. Cash-flush investors are poised to pounce. Brokerages are creating new divisions to focus on distressed properties.

And current owners fret about how many bad apples will be sold at the market, and consequently, the cost.

Reducing rents

After all, commercial distress doesn't just diminish nearby property values, as in residential defaults. Commercial distress also affects rents. Distressed borrowers may be prone to cut rates to lure tenants and boost cash flow. At the same time, landlords who scoop up foreclosure bargains will be able to undercut competitors who bought atop the market.

And that could compound the problem, because as demand drops, so do rental rates, weighing on values of buildings and further hampering refinancing.

Optimists point to factors that could turn a predicted hurricane of commercial foreclosures into a mere tropical depression.

They say many lenders are showing a willingness to prevent big borrowers from going completely under --efforts that may help preserve some asset values.

For instance, after Centro couldn't refinance $3.4 billion in debt, its lenders essentially took ownership of the company and worked out a new plan that gives the company until the end of 2011 to pay down debt. The deal saved the company -- and others --from fire sale prices.

It's not clear whether Centro will actually sell any properties in the Triangle. A Centro broker declined to comment.

Avoiding defaults

General Growth Properties of Chicago, which owns 200 malls across the country, including The Streets at Southpoint in Durham, has been able to avoid bankruptcy as lenders have extended deadlines on at least $2.25 billion in debt.

And some foreclosures have been conducted with stakeholders' input.

At Hasentree, for instance, SunTrust retained members of the development and management team. The bank intends to continue the development as originally envisioned.

But not all lenders will be able to play nice, especially those who are stressed after lending liberally during the boom.

For now, lenders and borrowers alike will watch to see whether government programs to collect so-called toxic assets ease the blow. They'll look for signs of thawing among frozen lenders. They'll squint for glimmers at the end of the tunnel.

And they'll cross their fingers that they have enough left in the tank to get there. or 919-829-8917

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