MALLS AROUND THE COUNTRY GOING BUST

There are quite a few U.S. cities that are complete and utter economic disaster zones in 2010 (Detroit for example), but there is something about the demise of Las Vegas that is absolutely stunning.  In recent decades, Las Vegas has become a symbol for the over-the-top affluence and decadence of America.  But now it is a microcosm of the economic nightmare that has gripped the entire nation.  When the sub prime mortgage crisis stuck, no major U.S. city was more devastated than Las Vegas.  When the recession went from bad to worse, Americans decided that they really didn't need to gamble so much and casino revenues plummeted.  Suddenly unemployment started to increase dramatically in Vegas and even today it continues to soar.  Like so many other cities that are highly dependent on tourism and entertainment, Las Vegas has gone from boom to bust.  Local officials are hoping that the worst will soon be over, but the truth is that the worst is yet to come.  As the U.S. economy continues to unravel, average Americans will be spending what little money they do have to put a roof over their heads and to feed their families.   The truth is that the glory days of Las Vegas are over and they are not coming back.     

Already, the number of unemployed in Las Vegas is reaching unprecedented levels.  Unemployment rates for the state of Nevada and for the city of Las Vegas both set new records during the month of April.  In Las Vegas the unemployment rate in April was 14.2%.  For the entire state the unemployment rate was 13.7%.

Of course those are just the "official" numbers.  We all know that the "real" unemployment numbers are much higher.

For example, the "official" unemployment figure is about 14 percent in the state of Michigan right now.  But if you actually believe that 86 percent of able-bodied workers in the state of Michigan are employed, then perhaps you would be interested in an offer to purchase the Golden Gate Bridge as well.

Elliott Parker, an economist at the University of Nevada, Reno says that the record-setting unemployment numbers in Nevada are just part of a larger trend.... 

"Nevada has been losing jobs since March 2008, and we are continuing to do so."

But where the state of Nevada and the city of Las Vegas have really been hammered is in the housing industry.

It is estimated that a whopping 65 percent of all homes in the state of Nevada are underwater.

Let that sink in for a bit.

65 percent of all home owners with a mortgage in the state of Nevada owe more than their homes are worth.

Talk about an implosion.

Nationally, the number of homes that are "underwater" is about 24 percent.  That is an all-time record for the entire nation, but it doesn't come anywhere close to the nightmare that is unfolding in Nevada and in Las Vegas.

And the number of foreclosures taking place in Nevada is absolutely breathtaking.

According to RealtyTrac, Nevada is still ranked number one for foreclosure filings.  In fact, one out of every 79 Nevada homes received a foreclosure filing in the month of May alone. 

Nevada’s foreclosure rate is now five times the national average.

By just about any measure, the economy of Nevada is a complete and total disaster.

A reader recently sent an email describing the economic horror that is unfolding in Las Vegas.  No matter what you may think about the city, the truth is that it is sad to see any great U.S. city fall to pieces like this....

"Las Vegas is a goner. The homeless population is out of control. The real estate is far worse than I have seen in the media (no surprise there). The towers of condos are ninety five percent vacant with zero activity. The streets and parks are in decline. Local governments are busy making cuts and fighting unions. When I ride the streets they are deserted, a big change from 2006. The major casino companies have all but moved the casinos out of Nevada. Rooms and restaurants have been closing for years, even while they finished the new projects. The entire town is a skeleton staff providing substandard service and decaying properties. I still work for one of the majors which is in bankruptcy. When the next wave hits there is nowhere to cut. It will be a game of dominoes with the Wynn properties the only ones left standing. I see the ninety nine cent breakfast making a comeback. The bullet train a day late and a few billion dollars short."

So is there any hope for Las Vegas?

Well, if the U.S. economy gets back up off of the operating table and roars back to life there is little doubt that millions of Americans would once again soon be flying there to gamble away their discretionary income.

But the truth is that any "revival" that is going to happen in Vegas is going to be very short-lived.

The U.S. economy as a whole is caught in a death spiral, and we are about to see a repeat of the housing crash that devastated Las Vegas so badly the first time around.

No, there really isn't any way that the death of Las Vegas can be avoided.  Just like the U.S. economy as a whole, it is inevitably doomed.  The numbers don't lie.

The grand total of all government, corporate and consumer debt in the United States is now equal to 360 percent of GDP.  That is a far greater level than the U.S. ever approached during the Great Depression.

The entire U.S. economy is a house of cards built on a gigantic pile of debt and paper money, and it is only a matter of time until it all comes crashing down.

But of course that isn't stopping the U.S. government from spending even more money and getting us all into even more debt.

According to a recent Treasury Department report to Congress, the U.S. national debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015.

But as many of you who have experienced this on a personal level know, getting into continually increasing amounts of debt never ends well.

So do any of you have a tale to tell about the city where you live?  Do you find yourself caught in the middle of an economic nightmare?  Feel free to leave a comment telling us what is happening in your area of the United States....

****UPDATE****

A number of readers have chimed in with some very insightful comments.  A sampling is below....

Vegas Bob:

I lived here in Vegas from 1998-2006 and moved back at the beginning of 2010. I worked in Corporate Finance for one of the largest casino operators up until I retired.

The article is spot on. Compared to its heyday in 2005-2006, Las Vegas today is an economic disaster zone. The condo I sold in 2006 for $172,500 now goes for $48,900 – a 72% haircut.

It’s not getting any better. Real estate prices are resuming their descent, now that the $8,000 home buyer tax bribe is gone.

The so-called economic recovery is for wealthy people only. Everyday people just keep getting the shaft. Obama is just another Republican with a ‘D’ after his name.

I’m glad I was smart enough to rent a place instead of buying one. I’m getting the hell out of this hellhole when my lease is up at year-end.

Tiara:

I am born and raised Vegas. When I say I was raised in Vegas I don’t mean a casino. I mean the middle of the dessert 30 miles north from the strip with the lizards and tumbleweeds. Vegas and I have a love hate relationship. I have seen this the growth in this town blow up in my face and now it is imploding just like an old worn out casino. It has been a crazy ride but due to the economy I will most likely be leaving Las Vegas soon. Growing up in this town has been interesting and leaving it will be bittersweet.

Craig:

I lived in Vegas in 2006 and have been back to visit many times. I was there recently for the first time after the economy imploded in late 2008—That town is a shell of it’s former self.

On any given night there are half the people on the strip that there used to be. The service even in the 5-star hotels has declined. You can see the lack of morale, sucked from the faces of the workers.

I loved this town in its hay day. Right now, it’s pretty sad.

Dolly:

Vegas was, and is, easy to understand. I’m in the musical equipment business– audio– and we go to Trade Shows.

These are held all over the world, but let’s contrast just two places, Los Angeles and Vegas:

If you go to Los Angeles, you will visit with the worlds best engineering talent, and a solidly-grounded people that are there to PRODUCE something OF VALUE. You have small manufacturers, Farm and Ranch people, Oil people, the film industry and plenty of unspoiled, honest, clean-living young people who work hard, and then play hard. Many are Surfers, etc., and are a breath of Fresh Air.

In short, a business convention or trade show in this city is a TREAT.

Now, let’s look at Las Vegas. Everything that’s big there is built around money manipulation and power. No one gives a damn about anybody else. Got a brilliant idea? One that Los Angeli nos would want to encourage you to develop and succeed at? NOT in Vegas! Any Casino in town handles more money than that in a microsecond. Besides– who are YOU? YOU don’t matter. Vegas gets all the big shows and all the big stuff– so YOU DON’T COUNT.

Want to hold a convention in a DECENT CITY– say L.A., or Denver? SORRY– Vegas will move right in– bribe the show principals and it WILL be held in Vegas. Look at what happened to the National Finals Rodeo– Oklahoma City was GREAT, but VEGAS has STOLEN it.

Vegas deserves the worst that can happen to it– GOOD RIDDANCE!

Bob:

LV was built by losers. I’ve lived in & near LV since ‘89, watched it grow cancerously, and now the tumor is shrinking… good riddance indeed to a grand delusion. This city is not electrified by the dam — it is fed with coal-generated power from Moapa. Fake Lake Mead is dying too ( and the city is fed by one old pipeline that can break down at any time … There is no primary industry here, just gambling and military — everyone here (except me, of course ) is living the Big Lie. The place is a death trap… stay away!

BD:

I recently went back to visit my old neighborhood (moved out of Vegas and sold my house in summer of ‘08) and talked with a few of my neighbors. Apparently its so bad they don't even park their cars on the streets anymore because “these damn people siphon gas out of your gas tank”.  No lie.  And this is a nice gated neighborhood in Henderson….

Commercial Real Estate Apocalypse in 2011-2012

Inquiring minds are digging deep into a 190 page PDF by the Congressional Oversight Panel regarding Commercial Real Estate Losses and the Risk to Financial Stability.

Executive Summary

Over the next few years, a wave of commercial real estate loan failures could threaten America’s already-weakened financial system. The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation’s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy.

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present “underwater” – that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties.

The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as $200-$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010.

Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses.

A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.

It is difficult to predict either the number of foreclosures to come or who will be most immediately affected. In the worst case scenario, hundreds more community and mid-sized banks could face insolvency. Because these banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery, and extend an already painful recession.

Present Condition of Commercial Real Estate

The commercial real estate market is currently experiencing considerable difficulty for two distinct reasons. First, the current economic downturn has resulted in a dramatic deterioration of commercial real estate fundamentals. Increasing vacancy rates and falling rental prices present problems for all commercial real estate loans. Decreased cash flows will affect the ability of borrowers to make required loan payments. Falling commercial property values result in higher LTV ratios, making it harder for borrowers to refinance under current terms regardless of the soundness of the original financing, the quality of the property, and whether the loan is performing.

Second, the development of the commercial real estate bubble, as discussed above, resulted in the origination of a significant amount of commercial real estate loans based on dramatically weakened underwriting standards. These loans were based on overly aggressive rental or cash flow projections (or projections that were only sustainable under bubble conditions), had higher levels of allowable leverage, and were not soundly underwritten. Loans of this sort (somewhat analogous to “Alt-A” residential loans) will encounter far greater difficulty as projections fail to materialize on already excessively leveraged commercial properties.

Economic Conditions and Deteriorating Market Fundamentals

The health of the commercial real estate market depends on the health of the overall economy. Consequently, the market fundamentals will likely stay weak for the foreseeable future. This means that even soundly financed projects will encounter difficulties. Those projects that were not soundly underwritten will likely encounter far greater difficulty as aggressive rental growth or cash flow projections fail to materialize, property values drop, and LTV ratios rise on already excessively leveraged properties. New and partially constructed properties are experiencing the biggest problems with vacancy and cash flow issues (leading to a higher number of loan defaults and higher loss severity rates than other commercial property loans).

For the last several quarters, average vacancy rates have been rising and average rental prices have been falling for all major commercial property types.





Current average vacancy rates and rental prices have been buffered by the long-term leases held by many commercial properties (e.g., office and industrial). The combination of negative net absorption rates and additional space that will become available from projects started during the boom years will cause vacancy rates to remain high, and will continue putting downward pressure on rental prices for all major commercial property types. Taken together, this falling demand and already excessive supply of commercial property will cause many projects to be viable no longer, as properties lose, or are unable to obtain, tenants and as cash flows (actual or projected) fall.

In addition to deteriorating market fundamentals, the price of commercial property has plummeted. As seen in the following chart, commercial property values have fallen over 40 percent since the beginning of 2007.



For financial institutions, the ultimate impact of the commercial real estate whole loan problem will fall disproportionately on smaller regional and community banks that have higher concentrations of, and exposure to, such loans than larger national or money center banks. The impact of commercial real estate problems on the various holders of CMBS and other participants in the CMBS markets is more difficult to predict. The experience of the last two years, however, indicates that both risks can be serious threats to the institutions and borrowers involved.

Although banks with over $10 billion in assets hold over half of commercial banks’ total commercial real estate whole loans, the mid-size and smaller banks face the greatest exposure.

The current distribution of commercial real estate loans may be particularly problematic for the small business community because smaller regional and community banks with substantial commercial real estate exposure account for almost half of small business loans. For example, smaller banks with the highest exposure – commercial real estate loans in excess of three times Tier 1 capital – provide around 40 percent of all small business loans.

Foresight Analytics, a California-based firm specializing in real estate market research and analysis, calculates banks’ exposure to commercial real estate to be even higher than that estimated by the Federal Reserve. Drawing on bank regulatory filings, including call reports and thrift financial reports, Foresight estimates that the total commercial real estate loan exposure of commercial banks is $1.9 trillion compared to the $1.5 trillion Federal Reserve estimate. The 20 largest banks, those with assets greater than $100 billion, hold $600.5 billion in commercial real estate loans.

Figure 17: Commercial Real Estate Loans by Type (Banks and Thrifts as of Q3 2009)







As seen in the Foresight Analytics data above, the mid-size and smaller institutions have the largest percentage of “CRE Concentration” banks compared to total banks within their respective asset class. This percentage is especially high in banks with $1 billion to $10 billion in assets. The table above emphasizes the heightened commercial real estate exposure compared to total capital in banks with $100 million to $10 billion in assets. Equally troubling, at least six of the nineteen stress-tested bank-holding companies have whole loan exposures in excess of 100 percent of Tier 1 risk-based capital.

Risks

In the years preceding the current crisis, a series of trends pushed smaller and community banks toward greater concentration of their lending activities in commercial real estate. Simultaneously, higher quality commercial real estate projects tended to secure their financing in the CMBS market. As a result, if and when a crisis in commercial real estate develops, smaller and community banks will have greater exposure to lower quality investments, making them uniquely vulnerable.

As loan delinquency rates rise, many commercial real estate loans are expected to default prior to maturity. For loans that reach maturity, borrowers may face difficulty refinancing either because credit markets are too tight or because the loans do not qualify under new, stricter underwriting standards. If the borrowers cannot refinance, financial institutions may face the unenviable task of determining how best to recover their investments or minimize their losses: restructuring or extending the term of existing loans or foreclosure or liquidation.

On the other hand, borrowers may decide to walk away from projects or properties if they are unwilling to accept terms that are unfavorable or fear the properties will not generate sufficient cash flows or operating income either to service new debt or to generate a future profit.

Delinquent Loans

Although many analysts and Treasury officials believe that the commercial real estate problem is one that the economy can manage through, and analysts believe that the current condition of commercial real estate, in isolation, does not pose a systemic risk to the banking system, rising delinquency rates foreshadow continuing deterioration in the commercial real estate market. For the last several quarters, delinquency rates have been rising significantly.



The extent of ultimate commercial real estate losses is yet to be determined; however, large loan losses and the failure of some small and regional banks appear to some experienced analysts to be inevitable. New 30-day delinquency rates across commercial property types continue to rise, suggesting that commercial real estate loan performance will continue to deteriorate. However, there is some indication that the rate of growth, or pace of deterioration, is slowing. Unsurprisingly, the increase in delinquency rates has translated into rapidly rising default rates.



The increasing number of delinquent, defaulted, and non-performing commercial real estate loans also reflects increasing levels of loan risks. Loan risks for borrowers and lenders fall into two categories: credit risk and term risk. Credit risk can lead to loan defaults prior to maturity; such defaults generally occur when a loan has negative equity and cash flows from the property are insufficient to service the debt, as measured by the debt service coverage ratio (DSCR).

If the DSCR falls below one, and stays below one for a sufficiently long period of time, the borrower may decide to default rather than continue to invest time, money, or energy in the property. The borrower will have little incentive to keep a property that is without equity and is not generating enough income to service the debt, especially if he does not expect the cash flow situation to improve because of increasing vacancy rates and falling rental prices.

Broader Social and Economic Consequences

Commercial real estate problems exacerbate rising unemployment rates and declining consumer spending. Approximately nine million jobs are generated or supported by commercial real estate including jobs in construction, architecture, interior design, engineering, building maintenance and security, landscaping, cleaning services, management, leasing, investment and mortgage lending, and accounting and legal services.

Projects that are being stalled or canceled and properties with vacancy issues are leading to layoffs. Lower commercial property values and rising defaults are causing erosion in retirement savings, as institutional investors, such as pension plans, suffer further losses. Decreasing values also reduce the amount of tax revenue and fees to state and local governments, which in turn impacts the amount of funding for public services such as education and law enforcement. Finally, problems in the commercial real estate market can further reduce confidence in the financial system and the economy as a whole. To make matters worse, the credit contraction that has resulted from the overexposure of financial institutions to commercial real estate loans, particularly for smaller regional and community banks, will result in a “negative feedback loop” that suppresses economic recovery and the return of capital to the commercial real estate market. The fewer loans that are available for businesses, particularly small businesses, will hamper employment growth, which could contribute to higher vacancy rates and further problems in the commercial real estate market.

Conclusion

There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public. An extended severe recession and continuing high levels of unemployment can drive up the LTVs, and add to the difficulties of refinancing for even solidly underwritten properties. But delaying write-downs in advance of a hoped-for recovery in mid- and longer-term property valuations also runs the risk of postponing recognition of the costs that must ultimately be absorbed by the financial system to eliminate the commercial real estate overhang.

Any approach to the problem raises issues previously identified by the Panel: the creation of moral hazard, subsidization of financial institutions, and providing a floor under otherwise seriously under capitalized institutions.

There appears to be a consensus, strongly supported by current data, that commercial real estate markets will suffer substantial difficulties for a number of years. Those difficulties can weigh heavily on depository institutions, particularly mid-size and community banks that hold a greater amount of commercial real estate mortgages relative to total size than larger institutions, and have – especially in the case of community banks – far less margin for error. But some aspects of the structure of the commercial real estate markets, including the heavy reliance on CMBS (themselves backed in some cases by CDS) and the fact that at least one of the nation’s largest financial institutions holds a substantial portfolio of problem loans, mean that the potential for a larger impact is also present.

There is no way to predict with assurance whether an economic recovery of sufficient strength will occur to reduce these risks before the large-scale need for commercial mortgage refinancing that is expected to begin in 2011-2013.

The Panel is concerned that until Treasury and bank supervisors take coordinated action to address forthrightly and transparently the state of the commercial real estate markets – and the potential impact that a breakdown in those markets could have on local communities, small businesses, and individuals – the financial crisis will not end.

• What about credit card defaults?
• What about another wave down in housing?
• What about the cumulative effect of banks being so under capitalized they could not lend if they wanted to?
• What if more businesses decide to walk away for properties?
• What happens to mortgage rates and rates for commercial loans when the Fed stops buying mortgage backed securities?
  

Those who think the steep yield curve guarantees the economy will soon be humming are in for a rude awakening. In the aftermath of a deflationary credit bust, credit conditions, debt levels, and attitudes are far more important than a steep yield curve, and those conditions are god awful.

10 Big Commercial Real Estate Busts

by David Ellis, Staff Writer
Wednesday, April 7, 2010provided by

As acute as the pain has been in the U.S. housing market, commercial real estate has been no stranger to trouble. Here is a glimpse of some high-profile victims that have been claimed so far.

1. Stuyvesant Town & Peter Cooper Village

Price Tag: $3 billion
Size: N/A
Location: New York, N.Y.

It was the deal that would underscore both the highs and the lows of the Manhattan real estate market. When insurance giant MetLife (NASDAQ:MET - News) put the 11,000-unit apartment complex on the block in 2006, it became one of the most coveted commercial properties, sparking a fierce bidding war.

In the span of a little more than three years however, Stuyvesant Town/Peter Cooper Village quickly morphed from the proverbial brass ring into a white elephant as its buyers choked on the massive amount of debt used to finance the purchase. The owners - Tishman Speyer Properties and BlackRock Realty -- handed over the property to its creditors in January.

2. General Motors Building

Price Tag: $2.9 billion
Size: 2 million square feet
Location: New York, N.Y.

New York City real estate mogul Harry Macklowe proved that in the world of commercial real estate, there can be too much of a good thing. In 2007, he scooped up seven Manhattan office buildings from private equity giant Blackstone Group, with the hopes of dramatically expanding the size of his real estate empire.

However, the loans used to make those purchases became nearly impossible to refinance once credit markets started to freeze up shortly thereafter. As a result, Macklowe's firm was forced to sell off some of those properties, including what perhaps was his most prized trophy: the General Motors (NASDAQ:GM - News) building, a 50-story white marble landmark with breathtaking views of New York City's Central Park and home to iconic toymaker FAO Schwartz as well as Apple's (NASDAQ:AAPL - News) flagship Fifth Avenue store. At least it wasn't all for naught -- Macklowe more than doubled his investment on the building after purchasing it for $1.4 billion in 2003.

3. Treasure Island Hotel Casino

Price Tag: $775 million
Size: 1.6 million square feet
Location: Las Vegas, Nev.

It wasn't swashbuckling pirates that ultimately brought Las Vegas icon Treasure Island to its knees. Rather, last year's distressed sale of the casino and its accompanying 2,885-room hotel was a necessary sacrifice for its former owner MGM Mirage.

Struggling with a difficult economic climate and hoping to raise some quick cash for its ambitious cross-town City Center venture, the casino operator sold the resort and its famous pirate battle display last March for a mere $775 million. Scooped up by Kansas billionaire Phil Ruffin, various estimates have placed the site's replacement value at nearly four times that amount at $2.7 billion, according to commercial real estate research firm CoStar Group.

4. John Hancock Tower

Price Tag: $660.6 million
Size: 1.76 million square feet
Location: Boston, Mass.

Boston's John Hancock Tower might just represent everything that went wrong with the broader U.S. commercial real estate market. Relying on massive amounts of financing, an ambitious New York City-based investment firm scooped up New England's tallest office building in 2006 for an eye-popping $1.3 billion, betting that Boston's office rental market and commercial property values would continue to remain red hot.

What they never anticipated, like so many other real-estate speculators, was the precipitous decline in property values and a spike in the nation's unemployment rate to above 10%, which drastically weakened demand for office space across the country. Unable to service the debt load, the property was sold in a foreclosure auction last March for less than half of the original purchase price.

5. Universal City Plaza

Price Tag: $304.8 million
Size: 774,240 square feet
Location: Universal City, Calif.

When the Hancock Tower stumbled, so did Universal City Plaza. Sold together as part of a portfolio of foreclosed holdings last March, the property became one of the more high-profile casualties of the Southern California commercial real estate market since the start of the recession.

Home to a number of media and entertainment companies, including NBC Universal and Universal Music, the 36-story building and surrounding land is now jointly owned by a pair of East Coast distressed investment firms.

6. Canyon Ranch

Price Tag: $308.5 million
Size: 808,508 square feet
Location: Miami, Fla.

In the world of commercial real estate, history does sometimes have a habit of repeating itself. For years, the Carillon Hotel was a fixture of the Miami Beach scene, only to be shuttered in the late 1980s as a result of a tough economic climate.

After a massive overhaul, the property reopened in 2008 as a hotel-condominium combination under the banner of Canyon Ranch, a well-respected name within the wellness community. That venture however would stumble yet again as a result of the recent economic downturn. Last fall, its developers handed over the remaining 300-plus unsold condos to its creditors.

Despite that hiccup, the Canyon Ranch development appears to be moving full steam ahead. More than 60 units have been sold since May and another 20 contracts are waiting to be completed, according to its current owners.

• Property vultures circle hedge fund capital