Motor City Maham

They call this the Motor City, but you have to leave town to buy a Chrysler or a Jeep.
Borders Inc. was founded 40 miles away, but the only one of the chain's bookstores here closed this month. And Starbucks Corp., famous for saturating U.S. cities with its storefronts, has only four left in this city of 900,000 after closures last summer.

There was a time early in the decade when downtown Detroit was sprouting new cafes and shops, and residents began to nurture hopes of a rebound. But lately, they are finding it increasingly tough to buy groceries or get a cup of fresh-roast coffee as the 11th largest U.S. city struggles with the recession and the auto-industry crisis.

No national grocery chain operates a store here. A lack of outlets that sell fresh produce and meat has led the United Food and Commercial Workers union and a community group to think about building a grocery store of its own.

One of the few remaining bookstores is the massive used-book outlet John K. King has operated out of an abandoned glove factory since 1983. But Mr. King is considering moving his operations to the suburbs.

Last week, Lochmoor Chrysler Jeep on Detroit's East Side stopped selling Chrysler products, one of the 789 franchises Chrysler Group LLC is dropping from its retail network. It was Detroit's last Chrysler Jeep store.

"The lack of retail is one of the biggest challenges the city faces," said James Bieri, president of Bieri Co., a Detroit-based real-estate brokerage. "Trying to understand how to get it to come back will be one of the most important keys to its resurgence -- if it ever has one."
Detroit's woes are largely rooted in the collapse of the auto industry. General Motors Corp., one of downtown's largest employers and the last of the Big Three auto makers with its headquarters here, has drastically cut white-collar workers and been offered incentives to move to the suburbs. Other local businesses that serviced the auto maker, from ad agencies and accounting firms to newsstands and shoe-shine outlets, also have been hurt.
The city's 22.8% unemployment rate is among the highest in the U.S.; 30% of residents are on food stamps.

"As the city loses so much, the tax base shrinks and the city has to cut back services," said Margaret Dewar, a professor of urban planning at the University of Michigan. That causes such hassles for retailers as longer police-response times, as well as less-frequent snow plowing and trash pickup.

While all of southeast Michigan is hurting because of the auto-industry's troubles, Detroit's problems are compounded by decades of flight to the suburbs. Hundreds of buildings were left vacant by the nearly one million residents who have left. Thousands of businesses have closed since the city's population peaked six decades ago. Navigating zoning rules and other red tape to develop land for big-box stores that might cater to a low-income clientele is daunting.
The lack of grocery stores is especially problematic. The last two mainstream chain groceries closed in 2007, when The Great Atlantic & Pacific Tea Co. sold most of the southeast Michigan stores in its Farmer Jack chain to Kroger Corp., which declined to purchase the chain's two Detroit locations, causing them to close.

A 2007 study found that more than half of Detroit residents had to travel twice as far to reach a grocery store than a fast-food outlet or convenience store. Michelle Robinson, 42 years old, does most of her shopping at big-box stores in the suburbs. When visitors staying at the hotel near her downtown office ask where to shop, she sends them to a mall in Dearborn, 12 miles away.
A few retailers are thriving. Family Dollar Stores Inc. has opened 25 outlets since 2003. A handful of independent coffee shops and a newly opened Tim Horton's franchise cater to workers downtown.

Discount grocer Aldi Inc. opened stores in the city in 2001 and 2005. A spokeswoman said the chain is "very bullish" on Detroit. Farmer's markets draw crowds looking for fresh produce.
Olga Stella, an official at the Detroit Economic Growth Corporation, works to persuade businesses to move to the city. She says companies have underestimated Detroit's economic potential and that Aldi and Family Dollar are proof there's money to be made here.
Meanwhile, the former Lochmoor Chrysler Jeep is now Lochmoor Automotive Group, a used-car dealership and repair shop. Gina Russo, daughter of the dealer's longtime owner, is being groomed to take over the family business. She has agreed to start selling small pickup trucks made by India's Mahindra & Mahindra Ltd.

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A Ticking Time Bomb (CRE)

WASHINGTON -(Dow Jones)- Some lawmakers welcomed news Tuesday that 10 of the nation's largest banks are poised to repay billions of federal assistance but warned that a "ticking time bomb" in commercial real estate could deal a punishing blow to lenders and the economy.
"I am very concerned about the ticking time bomb we face in commercial real estate lending," congressional Joint Economic Committee Chair Carolyn Maloney, D-N.Y. said at a hearing Tuesday. She noted that an estimated $400 billion of commercial real estate loans are coming due this year, with another $300 billion due in 2010.

If commercial real estate developers cannot refinance or pay off that debt, " we could expect to see the default rate on commercial mortgages climb much higher," Maloney warned.
Maloney's comments came at a hearing into the $700 billion Troubled Asset Relief Program approved by Congress to help banks saddled with soured assets linked to risky home mortgage loans. Just before the hearing began, the U.S. Treasury Department announced that 10 recipients of so-called TARP funds will repay a total of $68 billion, which Maloney called "welcome news."

The hearing follows the release of a new Congressional Oversight Panel report on the TARP, which faulted recent "stress tests" of 19 large financial firms by the Treasury Department and the Federal Reserve, saying the economic assumptions probably were too rosy and that the projections only run through 2010.

"We simply are asking for more," Congressional Oversight Panel chair Elizabeth Warren told lawmakers. She recommended that the stress tests be run again, with tougher assumptions, and be continued as long as banks hold troubled assets.As a case in point, Warren noted that the U.S. unemployment rate projected for 2009 under the stress tests' "worst-case scenario" was 8.9%, but "we're now at 9.4%,"

"This is a real concern, the worst case scenario in 2009 is in fact not the worst case," said Warren, whose panel is monitoring the Treasury's spending of the bailout money.
In addition, the oversight panel called for regulators to issue more information about the stress-test methodology, allowing outside analysts to replicate the tests themselves. -By Judith Burns, Dow Jones Newswires

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Its Only Just Begun

NEW YORK (Reuters) - The default rate of U.S. commercial real estate bank loans reached its highest level in 15 years and is not expected to peak until 2011, according to a report by Real Estate Econometrics.

During the first quarter 2009, the national default rate for commercial real estate mortgages held by regulated depository institutions rose to 2.25 percent from 1.62 in the fourth quarter of 2008, according to the real estate research firm's report released on Tuesday. The 0.63 percentage-point jump is the largest quarterly increase since at least 1992, and pushed the default rate to its highest level since 1994, the New York-based firm said. The default rate does not include loans on apartments, which increased by 0.68 percentage points between the fourth quarter and first quarter 2009 to 2.45 percent. The analysis of the data from the Federal Deposit Insurance Corporation (FDIC) includes non-farm, non-residential property where the primary source of repayment during the term of the mortgage is derived from the property's rental income. The multifamily results include buildings with five or more units.

Depository institutions hold about half the $3.2 trillion in debt on U.S. commercial property, with the commercial mortgage-backed securities market accounting for about 25 percent of that. Insurance companies and government-sponsored entities such as Fannie Mae account for the remainder.

Real Estate Econometrics attributed the default surge to rising vacancy rates, falling rents and increasing operating expenses all of which made it more difficult for borrowers to meet principal and interest obligations. Additionally, those borrowers who had been current were not able to refinance or sell their properties in order to meet balloon payments required by maturing mortgages because of the tight lending markets. Mortgages originated in 2006 and 2007 experienced the most significant cash shortfalls because of the large number of mortgages that were based on overly aggressive rent and occupancy projections.

"Increasingly, a challenge in refinancing these mortgages is that some lenders are seeking to diversify away from commercial real estate, while others are lending only with existing relationships," the report said. Real Estate Econometrics also revised its default projections higher. It sees the default rate rising to 4.1 percent by the end of the year, up from its prior forecast of 3.9 percent. By the end of 2010, the default rate is expected to rise to 5.2 percent, up from the prior outlook of 4.7 percent.


It expects the default rate for U.S. commercial loans held by banks to peak at 5.3 percent in 2011, up from its forecast of 4.8 percent. The more sour forecast was due chiefly to a more pessimistic outlook for the overall economy, a projected rise in long-term interest rates and a slower-than-expected policy response to commercial real estate credit constraints. It sees the national default rate for multifamily mortgages is projected to rise to 4.5 percent in the fourth quarter of 2009 and peak at 5.5 percent next year. ~ Reporting by Ilaina Jonas, editing by Matthew Lewis (Reuters)


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Commercial Real Estate CRE - The Economy's Anvil

Commercial real estate may soon bulldoze the green shoots.

A coming wave of defaults on loans to developers of condominiums, office buildings and malls could do significant damage to the already deflating economy. That was the overwhelming concern expressed at a public hearing of the Congressional Oversight Panel on Thursday that focused on corporate and commercial real estate lending.

The COP was set up last fall as part of legislation that gave the Treasury Department permission to spend $700 billion to rescue the nation's ailing financial system. The panel, which is headed by Harvard Law professor Elizabeth Warren, has no legislative or official regulatory powers. It is supposed to monitor the Treasury's spending and report back to Congress as to whether it is being effective in boosting lending, and shoring up the financial sector.

Thursday's hearing was one of a number of public forums the COP is hosting on different segments of the lending market. Warren is often criticized for being too critical of banks and their lending practices. But at the hearing on commercial real estate Warren focused on how big a problem future loan defaults will be and what should be done about it.

She got an earful. Richard Parkus, an analyst at Deutsche Bank, said he thought two-thirds of all commercial real estate loans due in the next few years, hundreds of billions of dollars worth, could go bust. Jeffrey DeBoer, president of trade group The Real Estate Roundtable, fretted that problems in the lending business could cost the nation thousands more construction and real estate jobs. Next up, Congressman Jerrold Nadler of New York expressed worry that the country was headed for a lost decade of economic stagnation.

There were not a lot of solutions offered. Nadler said he thought the government should create new banks. Those banks, unencumbered by souring loans, would boost lending. Nadler said he thought private investors would be interested in helping to fund the new banks. A number of the panelists thought the government's TALF and PPIP programs meant to boost lending were helpful, but not the answer. Parkus said he thought extending terms of commercial loans set to default would only delay the problem and make it worse. As more and more bad loans pile up, he predicted, it will become progressively harder for any of them to get refinanced.

What was clear from the hearing is that commercial real estate could turn out to be a much bigger problem for banks and the economy than the Treasury Department, the Federal Reserve and other bank regulators seem to believe. "The question is what percentage of commercial real estate loans will have trouble refinancing," Parkus said at the COP hearing. "It is likely to be a big problem."

How big? In the government's recent bank stress test, examiners predicted that commercial real estate loan losses for the 19 largest banks in the nation would be far lower than the value of home loans that go unpaid in the next two years--$53 billion versus $185 billion. But Warren said she thought the two-year horizon of the government stress test may have understated the size of the banks' commercial real estate problem. The government assumed different default rates for each of the 19 banks for commercial real estate and other types of loans. Warren said the government had not given much information as to what determined the default rate used for each bank; she plans to release a report on the stress test in early June.

Parkus concurred that the stress tests probably went too light on potential losses. He expects that a little over a $1 trillion in commercial real estate loans will be up for refinancing in the next four years. Because of falling real estate prices and lower rental incomes, he said, as many as two-thirds of those loans may not be eligible for refinancing and could end in default.

Kevin Pearson, executive vice president of M&T Bank, said he thinks banks will be able to avoid many of those loan losses through loan modifications, or "through blocking and tackling," as he put it. Parkus, though, said that outlook was too positive. He countered that banks will have a very tough time refinancing the poor loans they made at the height of the credit bubble. "There are very large losses embedded in the system," said Parkus.

Commercial Real Estate — the Economy's Anvil
By Stephen Gandel