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April 20, 2009

Is commercial real estate a time bomb?

Mall operator General Growth Properties' bankruptcy is worrisome. But even if commercial real estate weakens further, the market probably won't collapse.

CNN Money
By Paul R. La Monica

Can watchdogs draw any conclusions about the financial health of Atlantic Yards developer Forest City Enterprises from last week's news of the collapse of General Growth Properties? Well, yes and no...

General Growth Properties, the nation's second largest operator of shopping malls, filed for Chapter 11 protection Thursday morning. That makes General Growth (GGP) the biggest retail casualty yet of this recession, a downturn that also led to the bankruptcies of Circuit City, Linens 'N Things and Steve & Barry's.
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"Losses in commercial real estate will rise across the financial sector throughout the year," said Keith Hembre, chief economist with First American Funds in Minneapolis. Hembre said that banks have an estimated $1 trillion worth of exposure to commercial real estate. ...
"Historically, commercial real estate is one of the last areas to experience a downturn," Hembre said. "Employment is the driver that determines occupancy."

However, some investors believe that the commercial real estate market won't wind up completely melting down. For one thing, commercial real estate prices didn't get as out of whack with reality as residential real estate did.
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In addition, it's worth pointing out that General Growth's bankruptcy does not come out of the blue. The company has been reeling for months and was widely viewed as one of the weaker real estate investment trusts, or REITs.
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"Companies are not going bankrupt en masse," said Michael Cuggino, president of Pacific Heights Asset Management, a San Francisco-based investment firm that owned Kimco and ProLogis as of year-end. "Some REITs are raising capital when they have the chance and are being proactive about their debt instead of waiting until the last minute."

Hembre agreed that there is a shakeout now taking place in the real estate sector and winners and losers are emerging. So even though the General Growth bankruptcy is certainly a bad sign, it may not be the beginning of a massive wave of real estate bankruptcies.

article

NoLandGrab: Clearly, Forest City has been struggling with cash flow for the past year. Time will tell if the company has been proactive enough to get ahead of its own credit crunch, or if it remains in crisis mode and will emerge as one of the losers.

Posted by lumi at April 20, 2009 5:29 AM