As I walk to work in the morning I pass right by the headquarters of General Growth. General Growth is a corporation that owns over 200 shopping malls throughout the United States, along with other commercial properties. General Growth recently declared bankruptcy, stating that this filing will not impact operations at its properties. From their press release:
The decision to pursue reorganization under chapter 11 came after extensive efforts to refinance or extend maturing debt outside of chapter 11. Over many months, the Company has endeavored to negotiate with its unsecured and secured creditors to obtain the time needed to develop a long-term solution to the credit crisis facing the Company. Unable to reach an out-of-court consensus, the Company reluctantly concluded that restructuring under the protection of the bankruptcy court was necessary. During the chapter 11 cases, the Company will continue to explore strategic alternatives and search the markets for available sources of capital. The Company intends to pursue a plan of reorganization that extends mortgage maturities and reduces its corporate debt and overall leverage. This will establish a sustainable, long-term capital structure for the Company.
I am not an expert on the commercial property industry but am starting to learn more about it since it has an integral impact on the skyline of Chicago and many other cities around the country. Essentially the commercial property industry purchases properties mainly with debt, puts in a bit of equity, runs the properties, and then plans to sell them at a profit to another commercial property company. With low interest rates, easy lending terms, and many buyers, there has been an immense run up in commercial property, and companies like General Growth were flying high. GGP’s stock traded near $80 over the last couple of years, before collapsing near zero as the debt markets seized up.
The downfall of the commercial property industry, however, is the fact that many of the loans need to be “rolled over” every few years. On your home, for instance, you may have a 30 year mortgage. The debt on the commercial property industry, on the other hand, rolls over usually within 5 years. Given that a typical company has many projects, in the next 12-18 months many of these sorts of companies are finding loans coming due and they have no way to raise the money (except at punitively high interest rates, if they can find money at all), so they are all starting to go bankrupt and fall like dominoes. It doesn’t help that many of these enterprises bought properties in the go-go years of 2005-8, when prices were rising all the time and there were bidding wars – it is likely most / all of those properties today are worth less than they were purchased for which makes obtaining new financing even more difficult (try to refinance your home loan for more than the current market value of your home… it isn’t happening).
