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Cleveland Commercial Loan Delinquencies Signal
By Brian Louis
March 9 (Bloomberg) -- If you want to know what’s going to happen to commercial real estate across the U.S., look no further than Cleveland and Detroit.
Those two metropolitan areas lead the U.S. in mortgage delinquencies for owners of office buildings, apartments, malls and warehouses, a sign that cities hurt by the housing crisis will see their commercial markets dragged down next.
Commercial properties with mortgage payments 60 days late or more rose to 3.93 percent as of March in the Cleveland area and to 3.75 percent in the Detroit area, according to data compiled by Bloomberg. The North American commercial property delinquency rate is 1.1 percent, according to Standard & Poor’s.
Once-booming housing markets such as Phoenix and Las Vegas are likely next at risk, said Robert Bach, chief economist at Santa Ana, California-based broker Grubb & Ellis Co. The slump in housing and rising unemployment will probably take a toll on retail and office landlords, Bach said. The second year of the recession is cutting demand for commercial real estate after prices hit a record in 2007.
“There is really no part of the country being spared,” said Bach. “Cleveland and Detroit are just the first to feel the stress. They’re the canaries in the coal mine.”
The owner of the 40-story Tower at Erieview in downtown Cleveland gave notice it would miss a Nov. 1 debt-service payment on a $44.2 million loan because of capital expenses and declining occupancy, according to a Feb. 9 statement by Standard & Poor’s.
Distressed Property
Payments on the loan, which was packaged with other commercial real estate loans and sold to investors by Bear Stearns Cos., have resumed and the New York-based rating company “expects a minimal loss upon the completion of the workout.” JPMorgan Chase & Co., the largest U.S. bank by market value, bought Bear Stearns in a forced sale last year.
The property is on a list of distressed assets compiled by research service Real Capital Analytics.
Werner Minshall, chief executive officer of building owner Minshall Stewart Properties, declined to comment.
Loans secured by properties that were written assuming rental growth have been unable to meet targets, leading to increased defaults. The delinquency rate for North American commercial real estate loans in mortgage backed securities may triple in 2009 as loans default, Standard & Poor’s credit analyst Eric Thompson said in a Feb. 17 statement.
‘Frothy’ Bubble
“That peak was a very frothy tip of a bubble,” said David Geltner, director of research at the Massachusetts Institute of Technology’s Center for Real Estate. “I would expect defaults to start increasing sharply as a result of the recession.”
The Bloomberg Office REIT Index has dropped 41 percent this year through Feb. 6 after dropping 42 percent in 2008 on concern the economy and loan defaults will worsen.
Cleveland’s office vacancy rate was 14.8 percent in 2008 and is forecast to rise to 20.4 percent in 2010, according to CBRE Econometric Advisors, part of CB Richard Ellis Group Inc., the largest U.S. commercial real estate broker. A rate above 20 percent would be the highest since 1991, according to Jon Southard, principal at CBRE Econometric.
Cleveland’s unemployment rate was 7.1 percent in December. Ohio’s unemployment rate was 8.8 percent in January as the state lost 214,600 non-farm jobs, including 90,600 in manufacturing and 12,000 in financial services.
Tampa’s Showing
The Tampa, Florida, area was third in late payments at 2.9 percent in March, according to Bloomberg data. The Pittsburgh region was No. 4 at 2.7 percent and the Riverside, California metropolitan area was fifth at 2.6 percent. For the 26 largest metropolitan areas in the U.S., Bloomberg data covers 32,859 properties that back loans packaged into commercial mortgage- backed securities.
In Detroit, iStar Financial Inc. a New York-based financing company, took control of One Detroit Center in 2007 from Houston- based developer Hines as occupancy fell in the tallest office building in Michigan.
The 1-million-square-foot tower’s vacancy rate is 40 percent, according to Real Capital, which has the tower on a list of troubled assets. Kim Jagger, a spokeswoman for Hines, declined to comment.
Detroit’s economy has been hard-hit by job losses in the automobile and auto-parts industries. The area’s office vacancy rate was 22 percent in 2008 and is forecast to rise to 29.2 percent in 2010, which would tie it with Phoenix for the highest rate in the U.S., according to CBRE Econometric Advisors.
‘No Demand’
“There just is no demand,” said Jeffrey Bell, a first vice president and broker who specializes in downtown Detroit for Los Angeles-based CB Richard Ellis.
Unemployment in the Detroit area was 10.6 percent in December, the highest of 49 metropolitan areas with a 2000 U.S. Census Bureau population of 1 million or more, according to the U.S. Bureau of Labor Statistics.
The Detroit area’s foreclosure rate led the U.S. in 2007 and Cleveland was sixth, according to RealtyTrac Inc., an Irvine, California-based seller of default data. By 2008, Detroit had fallen to 10th, and Cleveland tumbled to 24th.
Retail developments across the U.S. from California to Florida are also being hurt as consumers pare spending, leading to loan defaults.
A $125.2 million loan backed by the Promenade Shops at Dos Lagos, a more than 350,000-square-foot retail development in Corona, California, in the Riverside region, is in default and payments are four months late, according to Bloomberg data.
Empty Space
The shopping center includes a Coach Inc. luxury goods store and clothing retailer Eddie Bauer Inc., according to the development’s Web site.
Josh Poag, chief executive officer for the project’s developer, Poag & McEwen Lifestyle Centers, based in Memphis, declined to comment.
The Riverside area’s economy is being hurt by rising home foreclosures and surging unemployment. The Riverside-San Bernardino region had the third-highest foreclosure rate in the U.S. in 2008, up from fourth in 2007, according to RealtyTrac. Unemployment was 10.1 percent in December, according to the Bureau of Labor Statistics. The U.S. unemployment rate was 8.1 percent in February.
Tampa’s foreclosure rate was 23rd in 2007 and rose to 13th in 2008. Phoenix was 22nd in 2007 and rose to 5th in 2008.
Lots of Vacancies
In Maple Heights, Ohio, a suburb southeast of Cleveland where the estimated population was about 24,000 in 2006, times are tough at Southgate USA, a 765,448-square-foot shopping center that’s in foreclosure, according to Bloomberg data.
“There’s been a lot of vacancies here at Southgate for a very long time,” said Arlene Orlando, the owner of Mining Company Jeweler Gold and Diamond Exchange, a jewelry store that has been in business for 21 years. “The customer base over here is dwindling very quickly.”
Southgate USA is 39 percent vacant, according to Bloomberg data. A $25.5 million loan backed by the shopping center, with a $21.9 million balance, was bundled with other loans in a commercial mortgage backed security and sold to investors by JPMorgan.
A Value City Furniture store, one of the anchors of the mall, shut down, Orlando said. A message left with Southgate USA wasn’t immediately returned.
Orlando said she’s never seen business this bad.
“This is by far the worst,” Orlando said.
To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net.
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