For example, the owners of the 1,200-unit Riverton apartment complex in upper Manhattan had counted on converting deregulated apartments to market-rate rentals at a faster pace. But when that didn’t pan out, they had trouble servicing their debt and were recently in danger of defaulting on their $225 million mortgage.

Trepp has uncovered 1,385 of these thorny commercial loans, totaling some $45 billion. The biggest portion is office properties (31%), followed by retail (25%).

General Growth needs $1.7 billion in the next six months to service its debt, much of it highly leveraged buys made during the boom. The company might be forced to put itself up for sale.

Finding loans to buy or develop a property is just as tough as refinancing one. Wide bond spreads mean that the source of funding that commercial real estate firms have used for the last decade — investment banks — “are more or less off the table,” Clancy says.

Sales volume in commercial real estate is down over 70% from last year, RCA says. A growing number of properties changing hands are distressed, if not in default.

Link.

“For institutional investors, even if you’re an all-cash buyer you’re probably going to want to remain on the sidelines because the conventional wisdom is that we still have a ways to go before we bottom out on the pricing in the industry,” says Steve Pumper, executive managing director of Transwestern’s investment services group in Dallas. “There is still a bid/ask spread and people are going to hold off.”

One glimmer of hope is the latest Congressional action, which has institutional investors learning a whole new set of acronyms when it comes to commercial real estate investing. Thanks to the new Emergency Economic Stabilization Act of 2008 (EESA) signed into law on Friday, Oct. 3, the Troubled Asset Relief Program (TARP) is quickly gearing up to buy billions of dollars in toxic assets from financial institutions to help unfreeze the credit markets.

While the legislation is designed to prop up strained balance sheets of Wall Street investment banks and Main Street commercial banks alike, many industry observers believe the legislation will do little in the short term to quell continued tight credit issues and stem falling property values.

“When I made a prediction earlier this year that the values would fall by as much as 30%, people thought I was off-base,” said Mike Kirby, director of research for Green Street Advisors. “The latest predictions are more than this.” Kirby made his point during a panel discussion at last month’s annual Pension Real Estate Association conference.

Link.

Yesterday I linked to a story from the New York Times suggesting that it might be time to look at REIT stocks. Today, Business Week’s Hot Property blog has a counterargument.

But with the stock market now showing some life is it time to buy these real estate-related firms?

No, says Michael Kirby, director of research Green St. Advisors. Green St. follows real estate investment trusts exclusively so when Kirby says ‘don’t buy them’ it means something. Overall his buy recommendations have returned 27% annually since 1993. His sell recommendations have appreciated .3%. The average REIT returned 12% on average over that time, according to the National Association of Real Estate Investment Trusts.

Kirby’s beef is that relative to corporate bonds; REITs still don’t look like a good deal. REITs are presently yielding 5.5% versus 7.8% for corporate debt. Moreover, REITs look expensive on a price to earnings basis, trading at 18 times earnings versus 12 times for the S&P 500.

Danger looms, particularly for office REITs, as some $185 billion in mortgage debt will need to get financed in 2010-12. It could trigger massive defaults, similar to what happened in the housing market.

I have a feeling we’re going to start seeing more announcements like this. If retail REIT shares are trading at a discount–which they arguably are even after rallying some today–then there should be some takeover opportunities in the market.

An affiliate of commercial real estate firm Compson Development offered to buy Agree Realty Corp for about $328.7 million, more than two years after it had made a higher bid that was shot down by Agree Realty.

The latest offer represents a price of about $27.50 per share — 25.3 percent more than Agree Realty’s Friday closing price of $21.95. Shares of Farmington Hills, Michigan-based Agree Realty were up more than 12 percent at $24.61 in late morning trade Monday on the New York Stock Exchange.

Compson Development affiliate Compson Holding Corp had tried to buy Agree Realty for $38.75 per share in cash more than two years ago, but was spurned as Agree Realty believed the offer was “not in the best interests of the shareholders,” Compson president Michael Comparato said in a letter to Agree Realty’s chairman. As of market close on Friday, the value of Agree Realty’s shares was 43 percent below Compson’s original offer, and Agree’s board must immediately find ways to enhance shareholder value, Comparato said in the letter.

“One of many alternatives available to the board of directors to maximize shareholder value would be to reconsider a sale of the company,” Comparato said.

Link.

The Atlanta Journal-Constitution has a pair of articles about the ICSC show taking place in Atlanta right now.

Hardest hit have been restaurants and high-end stores. Even when customers do sit down at a nicer restaurant, Del Monaco said, they’re more likely to opt for water than wine with their meal.

“A lot of retail tenants have called me and said, ‘I’m scared,’ ” she said.

On the other hand, August sales were up at wholesale clubs and discount stores.

“There’s a lot of uncertainty out there, with people waiting to see who gets elected president and the impact of that,” said convention attendee Harold Shumacher, an Atlanta restaurant broker. “People are very guarded.”

Despite the drop in attendance at this year’s ICSC conference, he said, “The core constituency of deal-makers, landlords, developers and tenants will still be there because they have to be.”

“Those of us who are older have been through this before,” Schumacher said. “Sure, we’re not happy about things being slow right now. But what goes up must come down. The question is, how long is the recovery going to take?”

This is interesting. Forever 21, unlike many other retailers, seems to be in a strong position with wealthy sales and a pile of cash to invest. Even more interesting is the fact that it wants to open big box locations as opposed to its more traditional smaller stores. As a result, it’s apparently going to make a play to get Mervyns’ locations so it can quickly roll-out its larger concept across the country.

Weeks after the mid-tier department-store chain filed for Chapter 11 bankruptcy protection, Forever 21 is bidding to buy 150 of Mervyns’ stores.

If successful in its purchase, Forever 21 would decide which stores to sell and which to keep open to expand the Los Angeles company’s growing retail empire.

“We have been looking at this kind of asset for years,” said Christopher Lee, senior vice president for Forever 21, whose array of fashionable apparel for young women and men is sold at bargain-basement prices.

Lee said the company recently submitted a bid to Miller Buckfire & Co., the New York financial adviser helping Mervyns with its bankruptcy, to buy 150 of the troubled company’s 176 stores. Mervyns, based in Hayward, Calif., is closing the other 26 stores. “We are the stalking horse,” said Lee, referring to the term that defines the first bidder in a bankruptcy proceeding. “We’ve submitted our proposal, and we are waiting.”

…

Most of Forever 21’s stores range from 10,000 to 20,000 square feet and are located in malls. But in mid-2006, Forever 21 launched its first department store–style outlet, which was much larger than the company’s traditional specialty stores crammed with merchandise. It converted an old Saks Fifth Avenue emporium encompassing 40,000 square feet in Pasadena, Calif., into a Forever 21 flagship store. It is packed with elegant touches, such as the marble-tiled floor, sweeping curved stairway to the second floor and chandeliers.

Forever 21’s goal has been to open more big-box concepts to keep its annual sales volume growing at a healthy clip. In 2007, sales revenues reached $1.3 billion. This year, they are expected to top $1.8 billion, Lee said.

Link.

Quoting Green Street Advisors, Bloomberg says commercial real estate is facing a “reckoning.”

This is one reason why it’s so hard to get a read on the true state of the sector. On one hand, we hear a lot of arguments that commercial real estate didn’t experience the same kind of bubble as residential real estate. Values are down and fundamentals are weakening, but we’re not seeing the historic kind of crash that is happening on the residential side.

On the flip side, there seems to be a lot of fear that things got too frothy in 2005, 2006 and 2007. Values got too high, lending got too generous and underwriting got too loose. There’s a feeling that we’re just in a waiting period until the damage from those days gets unleashed.

“The day of reckoning for commercial real estate has been delayed, not dodged, and the delay means that markets for commercial real estate will remain discombobulated long after conditions have improved elsewhere,” wrote Mike Kirby, chairman and director of research of Green Street, the Newport Beach, California-based firm that analyzes real estate investment trusts.

Values for commercial properties have dropped 20 percent from their 2007 peak, yet delinquency rates have been low in part because many loans taken out from 2005 to 2007 were interest-only, requiring no immediate paydown of principal, Kirby said in the firm’s October outlook report.

Low delinquency rates make the commercial market “feel healthier” than the housing market, Kirby wrote. Delinquencies are “certain to shoot higher,” as the economy weakens and borrowing costs rise, he said.

A record $600 billion of commercial mortgage-backed securities were originated between 2005 and 2007. The annual pace in those three years was almost triple the $70 billion a year originated in the first five years of this decade. Those loans now account for almost two-thirds of outstanding CMBS, Kirby said.

UBS isn’t waiting for the bailout to pass. It’s found a way to move some of its commercial and residential mortgage assets. Terms were not disclosed so there’s no way to know how much the bank marked down its assets or who bought them. But perhaps some of the vulture funds we’ve been hearing about were involved.

Shares of UBS soared 10.5%, or 2.06 Swiss francs ($1.81), to 21.76 Swiss francs ($19.21) on Thursday afternoon in Zurich, after the Swiss bank said it had “substantially reduced” its U.S. commercial and residential mortgage-related assets, mainly through disposals. A spokeswoman for UBS declined to value the size of the disposal or say where the toxic assets had gone.

UBS’s comments on Thursday suggest it could have disposed of up to 10.0 billion Swiss francs ($8.8 billion) of its toxic assets, said Jean Sassus, an analyst at Raymond James Equities in Paris. “This shows that there are buyers out there who we didn’t know about before, which is good news for everyone,” he said.

UBS declined to say whether the assets were going into government or private hands, but Sassus said the most likely situation was that a club of investors, possibly distressed debt funds, had snapped them up.

Grapevine-based GameStop Corp. announced it has acquired Micromania, a French video game retailer that has 332 locations throughout the country. The transaction, worth about $700 million in cash including the assumption of debt, still needs to be cleared by the European Commission and is expected to close in November.

GameStop bought Micromania from L Capital, a private equity fund that was the company’s controlling shareholder. GameStop didn’t have any stores in France, but the Micromania acquisition will put GameStop’s European store count at more than 1,077.

Link.

Could we see a spurt in buying activity before the bailout is enacted? It makes sense to me. The argument goes that commercial real estate is being unduly punished. So why not buy now when the getting is good? Moreover, for CMBS assets specifically, the terms offered by an opportunistic fund are likely to be less punitive than what the government has on offer. Others are skeptical, however.

Those investors feel that if they move quickly, they will be able to snap up deals before the government implements its $700 billion bailout plan, which could be voted on by the House as early as Monday. They point out that banks and other sellers of the soured securities and mortgages may be more willing to do deals with them because, unlike the government plan, they aren’t insisting on provisions such as a limit on executive compensation.

“We’ll try to buy some of the assets ahead of the transfer,” said Chris Hoeffel, a managing director at Bahrain-based Investcorp, which recently formed a $1 billion fund to buy high-yielding commercial real-estate debt.

Other opportunistic investors, though, say they likely will stick to the sidelines for now. They are skeptical that the government’s purchase of distressed assets will accurately establish what they are worth. So far, there have been few transactions, despite the desperation of banks to sell, because of disagreements over pricing.