Economic Update – CRE Delinquencies Spike in First Quarter

For some time now, commercial real estate defaults have been one of the other shoes waiting to drop on the economy, and that day may be closer at hand. Real Capital Analytics has reported that delinquent commercial real estate loans grew by 43 percent by the end of the first quarter of 2009 to $65.9 billion, compared with $46 billion at the end of last year.That hardly means that investment activity is going to grind to a halt, though. Indeed, one owner’s serious misfortune is another’s opportunity. A large (even trophy) example of that would be last week’s sale of Boston’s John Hancock Tower, which was snapped up at auction by Normandy Real Estate Partners and Five Mile Capital Partners L.L.C. for $661 million. Broadway Partners paid a princely $1.3 billion for the structure back in the hard-to-remember days of 2006, but more recently defaulted on the loan. Both Bloomberg and Reuters, citing unnamed sources, are reporting that casino owner MGM Mirage, which has been vexed recently by the reduced amounts people are willing to spend these days on gambling and other casino entertainments, is talking to private equity firm Colony Capital L.L.C. about refinancing some debts–provided Colony gets a lien on one or more of MGM’s properties. But fresh investment in CityCenter, the unfinished mega-project on the Strip, may not be in the offing. Currently the lending waivers for CityCenter expire on April 13. An old joke goes like this: You could line up all the world’s economists end-to-end and they still wouldn’t reach a conclusion. The same might apply for noted analysts. In a note to investors on Monday, Calyon analyst Mike Mayo downgraded the bank sector, citing continuing risks posed by credit card and commercial real estate loans. He thinks that in 2010, banks are going to lose on their loans, proportionally speaking, more than they did during a bad year of the Great Depression — 3.5 percent, compared with 3.4 percent in 1934. On the other hand, Rochdale Research analyst Dick Bove, also in a note on Monday to investors, noted that “my belief is that the economy has turned.” Losses for the banking sector, he asserted, have already peaked.Who to believe? Wall Street wasn’t quite sure on that point, with the major indices gyrating on Monday. Ultimately, bank stocks–major gainers in recent weeks–took a hit, leading to an overall decline. The Dow Jones Industrial Average was down 41.74 points, or 0.52 percent. The S&P 500 lost 0.83 percent and the Nasdaq was down 0.93 percent.