March 16, 2009
In Atlanta, a neighborhood revitalized in the 1990s as part of the city’s Olympic bid has been scarred again by vacant and abandoned homes, undoing years of progress. In Washington D.C.’s struggling Anacostia community, decades of work to rebuild and reinvest are being lost to blight brought on by foreclosures. In Detroit, speculators inspired by late night infomercials and eBay auctions buy foreclosed properties in bulk over the Internet, creating a class of absentee landlords with little interest in rebuilding neighborhoods.
Abandoned and vacant foreclosed homes rapidly piling up in neighborhoods like these around the country are serving as symbols of the secondary damage caused by the foreclosure crisis — a catastrophe felt on the ground but still unseen by Washington. While Treasury Department officials and lawmakers look the other way, communities with shrinking resources are mostly on their own to deal with the blight and drag on property values caused by staggeringly high numbers of empty homes left behind.
States and cities are racing to try everything they can, including creating land banks to take over the properties and fix them up or tear them down. But in a discouraging sign of things to come, some are so overwhelmed as they struggle to cope with record numbers of distressed homes that they can’t even pursue longer term solutions.
There’s still a huge mismatch between the capacity in devastated communities and the waves of foreclosures ahead: Alt-A loans resetting to higher rates in once-hot markets in California, Nevada, and Florida; empty big-box stores left behind by bankrupt retailers; new foreclosures tied to job losses and disappearing industries; and growing volumes of bank-owned foreclosed houses left in disrepair.
“This is a problem that’s only going to get worse unless it’s addressed,” said Frank Alexander, an Emory University School of Law professor in Atlanta who specializes in housing and community development. “Vacant and abandoned properties can be a terrible drain on a neighborhood, for as long as they exist. And some neighborhoods are never going to rebound from this.”That job is made even harder by the fact that, during the last eight years, the Department of Housing and Urban Development did little or nothing to promote innovative community development ideas, said Dan Kildee, chairman of the the Genesee County Land Bank in Flint, Mich., and the county’s treasurer. That void means communities are starting from scratch in searching for ways to fix the crisis, he said.
While they struggle, properties are left to decline, or to fall prey to speculators ranging from curious Internet surfers to get-rich-quick companies. Speculators make things worse by playing games with foreclosed properties, “treating them like baseball cards” and then walking away, Kildee said.
In Cleveland, Detroit, and elsewhere, speculators from out of state and even overseas buy bank-owned foreclosed homes on Websites like Craigslist or eBay for pennies on the dollar, then try to quickly flip them for a profit, or to rent them out before abandoning them. Speculators also are starting to scoop up vacant and foreclosed homes in stronger housing markets in places like Florida, where some properties aren’t selling because potential homebuyers are still waiting for prices to fall further or they can’t get loans.
One speculator who bought a handful of Detroit properties at fire-sale prices recently described his interest this way:
“I thought it would be quite good fun to have a look,” Darren Veness, who lives near Brighton, England, told the Associated Press.Alan Mallach, a housing and community development expert who spent time in Detroit last fall researching its housing crisis, has a different take.
A house that might sell in Detroit for as little as $10,000 still would command rent of $700 a month or more, because the rental market hasn’t collapsed yet, Mallach said. Speculators can collect that rent, while spending very little on minimal repairs, and within three years they’ll get their money back with a nice profit. Then, having taken all they can out of the property, they walk away. The house is “exhausted,” in further decline, and left to sell again for even less or to sit empty.The problem goes even deeper. In some cities, speculators and vacancies essentially have turned the clock back on previous development successes, noted Harold Simon, executive director of the National Housing Institute. Legitimate investors who took a chance on urban areas to open businesses or to buy properties in neighborhoods like Anacostia suffer from the death spiral of property values. Blocks once enticing to new buyers go downhill as they become pockmarked with foreclosed homes.
Speculation has gotten so out of hand that there are some neighborhoods in Detroit where every single house is owned by a speculator, Mallach said.
In Chicago, once-hot neighborhoods on the city’s North Side have become “condo ghost towns” because of foreclosures — and children are afraid to go out after dark because the empty properties have been taken over by drug dealers and criminals, The Chicago Tribune found. That reversal of past gains is among the most troubling aspect of the foreclosure fallout, Simon said.
“It’s undermined everything that’s been done before,” he said.That pattern holds true in Atlanta as well, where “we’ve got some neighborhoods here as bad as anything in Cleveland or Detroit,” said Alexander, the Emory University law professor.
In the early 1990s, Atlanta officials worked hard to rehab an ailing southwest city neighborhood, as part of its Olympics quest. Initially, the effort was a success, drawing new homebuyers to a previously neglected community. Now, however, thanks to mortgage fraud and rampant speculation, “it is undoubtedly as depressed there as it was in 1992 or 1993,” Alexander said. “The number of vacancies, abandoned homes, and squatters has basically wiped out all the progress made between 1995 and 2000.”Things aren’t likely to get better soon. As TWI reported recently, inventories of bank-owned foreclosed properties, known as REOs, are on the rise. Properties become REOs after they are taken back by banks when they fail to sell at sheriff’s sales or foreclosed auctions. Usually, banks try to quickly resell these properties, but the foreclosure crisis has changed all that, leaving bank REO inventories bloated and at record levels. RealtyTrac, an online foreclosure database, predicts some 3 million foreclosures ahead this year, with volume of bank REOs reaching an unprecedented high of 1.5 million.
Beyond that, banks are holding on to some 700,000 properties they still haven’t listed for sale, RealtyTrac reported last week, meaning many more foreclosed houses are in limbo, and have yet to hit the market. Some banks hire property managers to take care of the homes, but others fail to protect them from being vandalized and falling into decline.
Despite those looming threats, the biggest financial help for cities and states dealing with foreclosed properties to date has been nearly $4 billion included in the mortgage rescue bill passed by Congress last summer, and some $2 billion added in the recent stimulus package. To many, it’s not enough to even begin addressing the scope of the problem.
“It’s like putting out a million acre forest fire with a pick and shovel,” said Mallach, a fellow at the Brookings Institution and the National Housing Institute. “I realize the Obama administration has got a lot on its plate, and Treasury is understaffed. But the administration doesn’t seem to be grappling with this issue at all. A lot more people are going to be losing a lot more houses. We’re going to be seeing millions more vacant properties.”
Originally Published on January 20, 2009
During the Gold Rush of the mid 1800s, towns sprung up in the middle of nowhere to support those looking to strike it rich. Similarly, in suburban America, thousands of malls sprung up over the last 20 years to support those delusional shoppers who thought they could spend their way to prosperity.
When the gold rush ended as abruptly as it began, the towns were abandoned. These ghost towns sat vacant for decades, slowly rotting away under the western sun. As you drive around today, you see more and more “For Lease” signs on retailers and strip malls that fell under the initial onslaught of consumer deleveraging.
As the pace of retailers' collapse accelerates in 2009, larger malls will begin to go dark. Once bustling centers of conspicuous consumption and material decadence, built upon a foundation of consumer debt, they will become ghost malls.
For the last 20 years, the American consumer has carried the burden of the world on its broad shoulders. A heavy yoke, to be sure, but one that steroids made lighter — the steroid of choice for American consumers was debt: home equity loans, cash-out refinancing, credit-card debt, and auto loans. It’s been a wild ride, but it's over. The pseudo-wealth created over the last 20 years has begun to unwind and will increase in speed in 2009.
A permanent psychological change has since occurred. American consumers have lost $30 trillion in value from their homes and investments in the last few years. No amount of fiscal stimulation will reverse this trauma, and the consumer’s subsequent retrenching will be felt from Des Moines to Shanghai. Consumer spending has accounted for 72% of GDP; it will revert to at least the long-term mean of 65%.
David Rosenberg, the brilliant Merrill Lynch economist, describes it thus:
"This is an epic event — the end of a 20-year secular credit expansion that went absolutely parabolic from 2001-2007. Before the US economy can truly begin to expand again, the savings rate must rise to pre-bubble levels of 8%, the US housing stocks must fall to below 8 months' supply, and the household interest coverage ratio must fall from 14% to 10.5%. It's important to note what sort of surgery it is going to require.There are at least 1.1 million retail stores in the US, according to the Census Bureau. There are approximately 1,100 malls, not counting thousands of strip centers. These numbers will be considerably lower by 2011.
"We will probably have to eliminate $2 trillion of household debt to get there; this will happen either through debt being written off, as major financial institutions continue to do, or for consumers themselves to shrink their own balance sheets."
According to the ICSC, about 150,000 stores will shut down in 2009, in addition to the 150,000 that closed in 2008 and the 135,000 in 2007. Normally, 110,000 to 125,000 new stores open per year. At least 700,000 retail jobs will be lost. Some major retailers have closed or will close include: Circuit City (728 stores); Linens N Things (500 stores); Bombay Company (384 stores); Sharper Image (184 stores); Foot Locker (140 stores); Pacific Sunwear (153). Other large retailers are closing underperforming stores and scaling back expansions plans.
By 2011, at least 15% of the existing retail base will have gone to retail heaven. With the amount of vacant stores likely to reach in excess of 200,000 and vacancy rates for new malls already at 28%, there will be no need for new construction for many years.
Most of the retailers that are closing lease their locations from mall developers like General Growth Properties (GGP), Simon Property Group (SPG), Pennsylvania REIT (PEI) and Vornado Realty Trust (VNO). These developers will be hit by a quadruple whammy in 2009. General Growth Properties added $4 billion of debt in the last 3 years, and is now teetering on the brink of bankruptcy. Simon Properties, which owns or operates 320 malls, added $3 billion of debt in the same period. Many smaller developers will be in even direr straits.
Many developers borrowed heavily to finance massive mall expansion. The term of these loans were generally five to seven years. According to real-estate expert Andy Miller, the commercial collapse will be more rapid than the residential collapse:
“[You] may have 10 properties in a commercial pool that ultimately works its way into CDOs. Those loans are huge. You may have a shopping center loan in there for $25 million and an office building loan for $30 million dollars. As a result, if you have a default on just one of those loans, you can effectually wipe out all of the subordinate tranches.Vacancy rates have reached 9.4% for shopping centers, according to CoStar Group. With virtually no demand, rental income is plunging. With cap rates eroding and operating expenses going up, a perfect storm will hit mall developers in 2009. The negative feedback loop will accelerate as the year progresses and will spiral out of control by late 2009 and early 2010; ghost malls, particularly in the outer suburbs, will be the result.
"And that is why, when you see the problems begin to appear on the commercial front, it's going to be a much quicker sort of devolution than we saw on the residential side. In the commercial world, most of the financing that happened outside of the apartment business was done by conduits — and there are no more conduits left — and conduits were doing the stupidest loans you could find.
"They were doing an advertised 80% loan-to-value, which was usually more closely aligned to a 100% loan-to-value. They were dealing with no coverage. They were all non-recourse loans. Many of them were interest-only loans. Those loans are now gone. You can't refinance them, and if you could, the terms would be onerous."
Billions of dollars in debt will need to be refinanced in the next two years — and there’s no one willing to make those loans. The major mall developers are terrified and have launched full-court press to get their fair share of TARP. Commercial developer CB Richard Ellis (CBG) certainly didn’t sound too optimistic in a recent filing:
“We are highly leveraged and have significant debt service obligations. Although our management believes that the incurrence of long-term indebtedness has been important in the development of our business... the cash flow necessary to service this debt is not available for other general corporate purposes, which may limit our flexibility in planning for, or reacting to, changes in our business and in the commercial real estate services industry... Our level of indebtedness and the operating and financial restrictions in our debt agreements both place constraints on the operation of our business.”As Americans realize that they don’t need a $5 Starbucks latte, Jimmy Choo shoes, Rolex watches, granite countertops, and stainless-steel appliances, our mall-centric world will end. Anchor retailers like Macy’s, JC Penney and Sears are in for a heap of trouble over the next few years.
With shrinking cash flow, looming debt refinancing, and dim prospects for conspicuous consumption, mall developers are destined for a bleak future. Picture a spaghetti-Western-era Clint Eastwood riding a horse through the middle of your local mall — with maybe a few tumbleweeds blowing past that vacant Sharper Image.
James Quinn is a senior director of strategic planning for a major university. James has held high-level financial positions with a retailer, homebuilder and a university in his 22-year career.
May 22, 2009
Malls, those ubiquitous shopping meccas that sprang up in the 1950s, are dwindling in number, with many struggling properties reduced to largely vacant shells.
On the low-income east side of Charlotte, N.C., the 1.1-million-square-foot Eastland Mall recently lost a slew of key tenants, including a Dillard's and, next month, a Sears. Sales per square foot at the venue fell to $210 in 2008 from $288 in 2001.
As the recession alters American spending habits, traditional shopping malls like Eastland Mall are deteriorating at an accelerating pace.
The Metcalf South Shopping Center in Overland Park, Kansas, is languishing after plans to redevelop it into an open-air shopping district fizzled. The stretch of shops that connects the two largest tenants — a Sears and a Macy's — stands mostly vacant, patrolled by security guards.
With their maze of walkways and fast-food courts, malls have long been an iconic, if sometimes unsightly, presence in the American retail landscape. A few were made famous by their sheer size, others for the range of shopping and social diversions they provided.
But the long recession is helping to empty out the promenades. Some analysts estimate that the number of so-called "dead malls" — centers debilitated by anemic sales and high vacancy rates — will swell to more than 100 by the end of this year.
In the 12 months ended March 31, U.S. malls collectively posted a 6.5% decline in tenants' same-store sales, according to Green Street Advisors Inc., a real-estate research firm. The recent slump was led by an average 7.3% sales drop at Simon Property Group Inc., the operator with the largest number of mall locations.
The industry's woes are worsening. Thinning customer traffic, and subsequent hits to tenants' sales and profits, prompted Standard & Poor's Corp. last month to lower the credit ratings of the department-store sector. That knocked Macy's Inc. and J.C. Penney Co. into junk territory and pushed others deeper into junk. Sears Holdings Corp., a cornerstone tenant at many malls, is expected to close 23 stores this month and next.
General Growth Properties, which owns more than 200 U.S. malls, filed for bankruptcy protection April 16, due mainly to its failure to refinance billions of dollars of debt coming due. While the real-estate investment trust has said the filing will have no impact on its mall business, analysts say a prolonged bankruptcy proceeding could make retailers nervous about sticking around once their leases expire.
The severity of the recession is turning some malls that were once viewed as viable into potential casualties.
"Any mall that's sitting on life support is probably going to get its plug pulled" as the economy stalls, says Michael Glimcher, chairman and CEO of Glimcher Realty Trust, which owns 23 U.S. properties, including Eastland Mall in Charlotte.One industry rule of thumb holds that any large, enclosed mall generating sales per square foot of $250 or less — the U.S. average is $381— is in danger of failure. By that measure, Eastland is one of 84 dead malls in a 1,032-mall database compiled by Green Street. (The database focuses heavily on malls owned by publicly traded landlords and doesn't account for several dozen failing malls in private hands.) If retail sales continue to decline at current rates, the dead-mall roster could exceed 100 properties by the end of this year, according to Green Street. That's up from an estimated 40 failing malls in 2006, before the recession began.
"This time around, because of the dramatic changes in consumer spending practices, we're very likely to see more malls in the death spiral than we've ever seen before," says Green Street analyst Jim Sullivan.Failing malls didn't get into trouble overnight, and most began their descent long before the tough climate. Typically, a mall begins to suffer due to job losses and other pressures in the surrounding neighborhood or because a newer mall opens nearby. The loss of key tenants — such as the wave of department-store closures over the past three years — hastens the demise. Also sapping malls' vibrancy: the increased preference among consumers for big-box stores, such as Wal-Mart Stores Inc. and Target Corp., which rarely operate in malls.
Developers, in fact, have been moving away from the enclosed-mall format in favor of big-box centers anchored by free-standing giants such as Wal-Mart or open-air shopping centers with tiny parks and outdoor cafes sprinkled among fashion stores. Only one enclosed mall has opened in the U.S. since 2006: The Mall at Turtle Creek in Jonesboro, Ark.
These pressures, coupled with landlords' difficulties refinancing debts in the bone-dry capital markets, signal tough years ahead for retail-property owners — even after consumer spending begins to rebound.
"The shopping-center bankruptcies and the REIT bankruptcies are the ticking time bomb that people aren't talking about," says Burt P. Flickinger III, managing director of Strategic Resource Group, a research firm...For towns and cities that are home to dying malls, the fallout can be devastating. Malls hire hundreds of workers and are significant contributors to the local tax base. In suburbs and small towns, malls often are the only major public spaces and the safest venues for teenagers to shop, hang out and seek part-time work.
Commonly, "the mall will be a meeting place, or, in some cases, like a city center," says Carl Steidtmann, chief economist at Deloitte LLP. The deterioration of a mall can spawn broader problems, he notes. "It can become a crime magnet."During past economic cycles, dead malls were frequently redeveloped into mixed-use space that includes apartments, offices or parks. Repurposing mall space today will be more difficult. Lenders and investors are moving away from commercial real estate as property values decline and delinquencies rise on debt used to acquire or develop properties. Retail real estate has been hit especially hard, as declining retail sales and store closures hammer mall landlords.
In Charlotte, Eastland's deterioration into a dead mall matches the fate of many others across the U.S...
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