Commercial Real Estate Woes

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).

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Real Estate Bust in a Microcosm

Since the weather here in Chicago is usually so unfavorable, people love to go outside as soon as there is a break in the gloom. One of my favorite pastimes is to sit outside and have a drink, catch a little sun, and watch the world go by. It is even better if there is at least semi-edible bar food (I am not too picky).

When I lived in Wicker Park / Bucktown there is a local bar called “Northside” that has a great front deck near a busy intersection and it was fun to sit out there on a Friday afternoon or Saturday and just relax. Here in River North there are some outdoor spaces but I liked to take a walk up to a place called “Melvin B’s” that had a nice deck outside in the V*agra Triangle.

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Defining the Family Down

Taranto links, with some irony, a NYTimes article emphasizing one aspect of census news, an increased percentage of black children live within a family:

Demographers said such a trend might be partly attributable to the growing proportion of immigrants in the nation’s black population. It may have been driven, too, by the values of an emerging black middle class, a trend that could be jeopardized by the current economic meltdown.
The Census Bureau attributed an indeterminate amount of the increase to revised definitions adopted in 2007, which identify as parents any man and woman living together, whether or not they are married or the child’s biological parents.

We suspect the third “indeterminate” reason is key and the news may not be all that great. But how do we know? Taranto has fun with this, but it has serious implications. It appears a combination of “political correctness” (ah, he says he loves the child; isn’t that the same as being a father – even better, perhaps?) and post modernism (words can mean whatever the hell we want them to, so can traditions, so can biology).

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Gentrification… and the Lie of History

In the NY Times this weekend they had an article about a one man show by Danny Hoch. The topic of his show was gentrification, and how it impacted natives of New York City. In the article they reviewed him and he had the following quote:

“I did a lot of community arts work through the 90’s, really believing that we were making a difference socially…. Within the last 10 or 15 years, those communities have virtually been erased.”

On a seemingly unrelated line, there is a history of the neighborhood that I live in, the River North neighborhood in Chicago. Here is a link to a document summarizing River North history, notably its time as a manufacturing area called “Smokey Hollow”. This article summarizes the demographic changes in the Near North neighborhood of Chicago by decade.

These types of documents talk about the history of a neighborhood as if it was continuous, with links between each era. However, the reality of urban areas like River North (and the New York of Mr.Hoch) is really quite different. Aside from some projects just north of Chicago Avenue near Cabrini Green, the neighborhood has turned over to a degree that most US residents would find astounding. There are literally no individuals living in River North that were even here ten to fifteen years ago.

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