The second-biggest US mall owner General Growth Properties defaulted last month when a $144 million loan on a property came due. The default by General Growth Properties could be a sign of troubles to come.
[graphiq id=”koC9fbUh0X3″ title=”General Growth Properties Inc. (GGP)” width=”440″ height=”553″ url=”https://w.graphiq.com/w/koC9fbUh0X3″ link=”http://listings.findthecompany.com/l/31679019/General-Growth-Properties-Inc-in-Chicago-IL” link_text=”General Growth Properties Inc. (GGP) | FindTheCompany” ]
A staggering $47.5 billion of loans backed by retail properties are set to mature over the next 18 months.
Fewer people are shopping in malls and instead chasing cheaper bargains online. Massive job cuts are planned across the retail sector as a result of slumping sales. We have poor earnings forecasts from retailers like Macy’s and Nordstrom, plus bankruptcy filings by chains such as Aeropostale and Sports Authority. With big retailers in a slump, how commercial property owners will have enough money to make their mortgage payments is a mystery.
The dire commercial property market will expand to stocks and could pull down the entire market. The Columbus Dispatch writes…
Insurance companies and banks that are eager to issue loans on high-end shopping complexes aren’t as willing to take a chance on a shaky mall. That pushes borrowers toward Wall Street firms that underwrite loans to sell to investors as commercial-mortgage-backed securities.
Investors that hold mortgage-backed securities could be in for bad times ahead unless the Federal Reserve comes to the rescue and starts buying toxic commercial-mortgage-backed securities.
In a sign of how bad things are for commercial mortgages, the U.S. Small Business Administration (SBA) has recently announced the restart of the SBA “504” loan refinance program. The program expired in 2012 after refinancing more than $5 billion in small business commercial mortgages following the Great Recession. No, I’m not making this up. An emergency finance program that was last used during the Great Recession just started up again on June 24, 2016!
The way a 504 loan works is that the lender finances 50% of a transaction while an SBA-approved Certified Development Company finances 40%, and the borrower is required to pay a 10% down payment.
Starwood Capital Group is planning to dump $1.2 billion worth of properties while they still can.
Many commercial landlords are choosing to walk away and stick the lender with the property. The message is clear: lenders beware. If a mall is not accretive to the REIT, they just walk away from it.
REIT Investors Have No Clue That Something Wicked Is Coming
REIT investors have no clue that loan defaults are coming at them full speed ahead. Worse, REIT investors have no clue that a flat or inverted yield curve will crash REIT markets.
Below is a chart showing all time popularity of REITs as investors pile in. I overlayed the yield curve in early 2007. Notice how a flat or inverted yield curve crashed REITs because REITs borrow money short term, loan it out long term, and make profits off the spread.
The current yield curve is normal but it’s flattening quickly as REITs profit margins are squeezed.