Real estate woes seep into malls, office towers

Lower rent prices?

As more office towers put out the “For Rent” signs, rents would likely fall. “We expect double-digit declines over the next three years,” Southard adds.

One example of how the market has worsened: Boston’s John Hancock Tower. Broadway Partners bought the iconic blue sliver of glass and steel for $1.3 billion in 2006. Today, based on rent and occupancy expectations for the Boston metro area, it may be worth as little as $575 million to $735 million, says Victor Calanog, director of research at Reis, a real estate advisory company in New York.

“When the building was purchased, that was a good year at the time, and the price was reasonable – if the good years had lasted,” says Mr. Calanog.

In Miami, rents in office towers are now down to 2003 levels, says Tere Blanca, president and CEO of Blanca Commercial Real Estate, Inc. The vacancy rate for office space is about 13 percent.

Empty shop windows at the mall

Problems are cropping up in shopping centers as well. Large regional malls had a 7.1 percent vacancy rate in the fourth quarter of 2008 – the highest level since 2000, according to Reis. “They are in trouble because, for the first time in 17 years, the consumer has scaled back their spending,” says Calanog of Reis.

When a mall operator loses a retail client, the effect may spread to other retailers in the same area.

“Empty stores in a mall deters shoppers just like it deters them in downturn areas if there is vacant space at street level,” says Todd Sinai, an associate professor of real estate at the Wharton School at University of Pennsylvania in Philadelphia. “Then if your retailers stop selling you cannot get new tenants.”

In a few cases, mall operators are delinquent on their loans. The operator of the Promenade at Dos Lagos in Corona, Calif., has missed some payments. But Joshua Poag, president and CEO of Memphis-based Poag & McEwen which runs Corona, says by e-mail that the company is current with its eight other malls.
In fact, the delinquency rate on commercial mortgages is only 1 percent at this point.

“The problem is refinancing,” says Rosen.

Opportunity among rubble

At least one debt-free real estate investor, the Gaedeke Group in Dallas, Texas, views the current situation as an opportunity.

“We are looking to buy assets,” says Belinda Dabliz, vice president of leasing. “There is a lot of debt coming due, and people have no way to restructure it.”

But if the federal bailout doesn’t happen, “we’re going to get a wave of delinquencies,” says Rosen.

Does that mean real estate developers such as Mr. Trump or Mort Zuckerman – both living the lifestyles of the rich and famous – will be looking for help from the government?

“The great hope is that every player in affected markets will somehow survive the coming – or is it here already – storm,” says Calanog. “The difficulty is ensuring that players who behaved poorly – borrowed, lent, or paid too much – are also penalized, otherwise we run into the classic moral hazard problem.”

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