Written by Stan Ross, Chairman of the Board, USC Lusk Center for Real Estate
Even if there is an inflationary spike, real estate could be a beneficiary. It will favor owners of properties with short-term leases and properties with large near-term rental rollovers. It will also benefit those with long-term fixed-rate debt, as they could repay their debt with a devalued currency, but don't forget there could be another side to this with higher interest rates.
People always ask me where are the opportunities in today's marketplace and how do you find them? In the first quarter of this year, 20,251 businesses sought either Chapter 7 or Chapter 11 protection. With all these filings, there will be distressed asset sales. General Growth filed with 158 regional centers - 200 million square feet of retail representing $27 billion in debt.
But the real action is still with the banks. So far this year, 106 federally insured banks and thrifts have already failed -- the most since 1993 which was around the end of the savings-and-loan crisis -- and more than 400 banks are on the FDIC's "problem" list.
More than half of the $3.4 trillion in outstanding commercial real-estate debt is held by banks. A separate report at the Fed meeting predicted that commercial real-estate losses would reach roughly 45% next year. Bank examiners are stepping up their scrutiny of commercial real estate portfolios at U.S. banks.
Citicorp was getting beat up in a court battle on construction financing. A New York state court this summer ordered Citigroup to keep making payments on its $155 million construction loan on the first phase of a project called Destiny, which had been on track for completion by the end of this year. NY Supreme Court Justice John Cherundolo ruled that the borrower provided "unrebuttable and undeniable" evidence that Citigroup's claim was erroneous. He also suggested that Citigroup might have tried to get out of its funding commitments because it needs to preserve capital. The order has been stayed, however, while Citigroup appeals the ruling.
While each case is different, banks demand that developers put in more equity because of lower real-estate values or cost overruns.
Developers argue that lenders are using the falling values as an excuse to stop their funding. They are calling them "contrived defaults."
