Zombie strip malls coming to your neighborhood

The walking dead, or in this case the standing and empty dead, are coming soon to a strip mall near you. The numbers are scary:

1. The commercial mortgage market is roughly $3 trillion dollars.
2. There is over $150 billion in commercial mortgages (1% of GDP) in the United States are coming due.
3. Since 2007, commercial properties have declined 50% in value.

Armageddon at the Strip Mall

Kevin D. Williams, National Review, 4 February 2012 (Hat tip: NC)

Typical terms included a 20 percent down payment and a five-year payment schedule that required little more than interest payments. An $80 million mortgage on a $100 million property is not so bad, but an $80 million mortgage on what is now a $60 million property is a problem. More than half of the 2007-vintage loans are expected to have trouble refinancing, and maybe well more than half.

This is true even for borrowers who have never missed a payment. Banks are required to take into account a number of factors when rating commercial mortgages. One of the most important is the loan-to-value ratio, which has a lot of borrowers over a particularly uncomfortable barrel: They may have the cash to make their payments, and they may have the cash flow to continue making payments on a refinanced loan, but their properties still are worth less than their mortgages, so nobody wants to refinance. And those are the lucky ones: Just as those loans were mostly for five years, most commercial leases are for about the same length of time. With retail and office-space rentals down, lots of commercial borrowers are sitting on largely vacant properties that are not producing much in the way of cash flow. Among the more high-profile cases, the WTC 3 tower at the World Trade Center still has not located an anchor tenant, which could put the much of the project on ice. Thousands of strip malls across the fruited plains have empty storefronts, and thousands of office buildings have floor upon vacant floor.

It goes on to note that conditions are dire throughout the country.

The author is properly alarmed.  The author might be even more alarmed if he knew a little more about commercial construction cycles- mostly that it takes time to large buildings onto the drawing board, so it is generally a couple of years behind the rest of the business cycle.

So although a lot of people in construction were alarmed because there was no new work coming in, many of them were still working off the remnants of their book of business.  We probably won’t see the peak of refinancing until 2013, and the very tail end until 2015.

A haunted shop (or so they say)