Will commercial real estate smack Tampa Bay?
Wake up and good morning. It's been swirling out there in the distance like threatening storm clouds. Will the commercial real estate market become Tampa Bay's next big headache in this rough recession?
Bloomberg News thinks so. After Cleveland and Detroit, Tampa leads the country in mortgage delinquencies for owners of office buildings, apartments, malls and warehouses, a sign that cities hurt by the housing crisis will see their commercial markets dragged down next. The Tampa area was third in late payments at 2.9 percent in March, according to Bloomberg data.
Is that a bad figure? The North American commercial property delinquency rate is 1.1 percent, according to Standard & Poor’s. Tampa’s foreclosure rate was 23rd in 2007 and rose to 13th in 2008.
In recent remarks in Orlando, Atlanta Fed President Dennis Lockhart (shown in photo) called commercial real estate “the one domestic factor that keeps me up at night. Many banks are pretty heavily exposed to commercial real estate,” he said. In other remarks this month in Miami, Lockhart outlined his concerns:
* All subsectors of commercial real estate -- retail, office, hotel and industrial -- are facing problems.
* The growing imbalance of retail space was aggravated because lots of new retail space was added in areas that saw a high level of home construction, much of which has not been absorbed.
* General weakness in the retail industry (look at this past weekend's final shutdown of the Circuit City chain) means established retail centers are seeing rising vacancy rates. When an anchor tenant leaves a shopping center, or overall occupancy falls below a threshold level, other tenants are often free to cancel their leases.
* The hotel subsector is facing excess supply in the face of soft demand. Occupancy rates declined about 8 percentage points in the fourth quarter of 2008. Now business travel is declining as companies scale back in a weak economy.
*The National Association of Real Estate Investment Trusts estimates that about $400 billion of commercial mortgages are set to mature this year, raising concern about maturity defaults.
In its ranking of troubled commercial real estate markets, Bloomberg says the Pittsburgh region was No. 4 at 2.7 percent and the Riverside metropolitan area in California was fifth at 2.6 percent. For the 26 largest metropolitan areas in the U.S., Bloomberg data covers 32,859 properties that back loans packaged into commercial mortgage-backed securities. Robert Bach, chief economist at Santa Ana, Calif.-based broker Grubb & Ellis Co., adds:
“There is really no part of the country being spared. Cleveland and Detroit are just the first to feel the stress. They’re the canaries in the coal mine."
And apparently Tampa is twittering right behind them. "Good riddance" is how Grubb & Ellis described its bon voyage and analysis to the 2008 Tampa office market. Its outlook on the industrial market is also sober.
Nationally, loans secured by properties that were written assuming rental growth have been unable to meet targets, leading to increased defaults. The delinquency rate for North American commercial real estate loans in mortgage backed securities may triple in 2009 as loans default, says Standard & Poor’s credit analyst Eric Thompson.
-- Robert Trigaux, Times Business Columnist