BREAKING NEWS
September 11, 2007
Subrime Fallout
As the credit squeeze from escalating residential loan defaults takes a toll on real estate services companies, the owners of commercial buildings are also experiencing pain
While much of the subprime mortgage problem has focused attention on the residential market, Chicago-area office landlords are now feeling the pain as the problems spread into various channels of the commercial property industry.
Gone are the days of frenzied commercial property sales with investors buying buildings at high prices, raising rents and flipping them at even higher prices.
Now, rather than anticipate big sales, commercial landlords are worrying about how to pay the debt on buildings that are generating less income than just a few months ago.
It's a national problem but one that is felt more acutely in Chicago, where rents were already low and where new office space threatens to push down prices even more. This dynamic has caught squeezed office owners off guard.
With leasing sluggish, especially in the northwest suburbs, lowering rents to attract tenants will lower properties' financial performance and threaten property values. This makes it difficult to pay off loans that in recent years have covered as much as 95 percent or more of a building's cost. As rents diminish and credit rating agencies lower the extravagant asset value assessments of recent years, an owner could be holding a building that is worth less than the amount owed on it.
"For landlords, it's a vicious cycle," said Joseph Cosenza, vice chairman of the Inland Real Estate Group of Cos. in Oak Brook. The more landlords lower rents, the more property values sink.
Then, "if a landlord can't sell a building and can't afford to pay the 95 percent leverage on it plus operating expenses, they're likely to default," he added. " If they give buildings back to the lender that could cause credit problems throughout the country."
Downtown Chicago, meanwhile, has 6 million square feet of new offices in development.
"It's a bit of a quagmire for landlords that recently bought at high prices with expensive short-term loans," said Doug Shehan, a senior director at Cushman & Wakefield. "They bought on the dream that rents would rise but not many have achieved that."
Chicago Tribune |