By Kate Gibson
The stock market has for weeks been dogged by talk of trouble
lurking in commercial real estate, yet an exchange-traded fund of
commercial property companies has rallied 50% in the last two
months -- despite commercial mortgage delinquencies hitting 11-year
highs in April.
Delinquencies are up "by a factor of five from a year ago. Even
though commercial real estate lags the cycle, the numbers highlight
the battle banks face in producing profits," said Nick Kalivas,
equity analyst at MF Global Research.
Property research firm Trepp LLC on Thursday reported the level
of loans 30 days or more behind in payments last month climbed to
2.45%, with the credit squeeze making it hard for landlords to
refinance bank loans.
"We're very concerned about commercial real estate," said Bill
Feingold, managing director at Newport Value Partners. He believes
the stock market has gotten ahead of itself, rallying on earnings
from banks and other companies that stem from cost cuts as opposed
to growth.
On Friday, financial shares paced strong gains after the Labor
Department reported job losses slowed in April. . The Dow Jones
Industrial Average (DJI) was up 164.80 points, or 2%, to stand at
8,574.65, giving the blue chips a weekly gain of 4.4%. The S&P
500 (SPX) added 21.84 points, or 2.4%, to 929.23, which translates
into a 5.9% rise from the week-ago close. The Nasdaq Composite
(RIXF) advanced 20.76 points, or 1.3%, to 1,739.00, up 1.2% for the
week.
Also rallying, the Dow Jones U.S. Real Estate Index (IYR) rose
6.8% to 34.81, up nearly 57% from its March 6 close of 22.21. In
the same time, the S&P 500 has gained 39% from its March 6
low.
Capital needs
The index's components include Simon Property Group Inc. (SPG),
the nation's largest mall owner and biggest publicly traded U.S.
real estate company.
Simon Property on Wednesday said it would sell $800 million in
new stock, its second foray into the equity markets in less than
two months, illustrating its need for capital.
Shares of Simon Property on Friday gained 2.8%. The company
earlier this month reported first-quarter earnings rose 14% amid
higher rents, although occupancy rates weakened as retailers hit by
declining sales posed difficulties for mall landlords, some of whom
are saddled with large debt.
One case in point is Simon Property rival General Growth
Properties Inc. (GGWPQ), which last month filed for bankruptcy
protection as the Las Vegas developer and shopping mall owner
struggles to restructure $27 billion in debt.
Once one of the most highly valued REITs [Real Estate Investment
Trusts] in the market, Nasdaq has since suspended trade of General
Growth Properties' stock, which in recent weeks dived under one
penny. A year-ago, its stock priced at $42.00 a share.
One of the key stand-outs in the most recent Senior Loan Officer
Survey is "the extent to which demand for commercial real estate
loans has collapsed," Merrill Lynch & Co. Inc. analysts Drew
Matus and David Rosenberg wrote in a Tuesday note.
The net percentage of banks reporting weaker demand for
commercial real estate jumped to 66% in the second quarter from 55%
in the first quarter in what the analysts called the weakest
showing on record.
"Meanwhile, the majority of banks continue to tighten their
lending standards on commercial real estate loans. Fully 66% of
banks tightened standards and, though that is marginally better
than the 79% in Q1, this tells us that we can expect continued
declines in commercial construction the quarters ahead," Matus and
Rosenberg said.