Shaky Commercial Real Estate Threatens Economy's Foundation by Malcolm Berko on Creators.com

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Shaky Commercial Real Estate Threatens Economy's Foundation

Dear Mr. Berko: Several months ago you wrote that the commercial and industrial real estate market was in the process of a shakeout. You said office, store and factory vacancies in big cities were extremely high and that the banks will be in even more trouble when the commercial and industrial sectors stop making payments on their mortgages. In March I invested $100,000 in eight big, national bank stocks and now I'm concerned that some of them could have large exposure to the commercial and industrial real estate market. Can you tell me which large banks have big exposure? And are there any good speculations among some of the real estate investment trusts that hold commercial and industrial real estate? I'd use the proceeds, if I have to sell some of my bank stocks, and maybe even add some money, if you have a few real good recommendations. — R.T., Boca Raton, Fla.

Dear R.T.: There's about $8 trillion in commercial and industrial real estate mortgages out there. Even though that market is in trouble, you won't hear much about it because these mortgagors and mortgagees like to keep their pain close to the vest. But there's big trouble brewing in big cities nationwide.

In your South Florida neighborhood, vacancy rates are as high as 20 percent. Large shopping centers, factories and office buildings are as empty as Old Mother Hubbard's cupboard. Because of high property and construction costs, there's little likelihood these properties can be rented at the rates necessary to meet mortgage and maintenance costs. Many believe those rates will have to fall by at least 50 percent.

Today's lessee can't afford $60 to $120 per square foot plus percentage revenues that the lessee needs to meet his mortgage obligations. Those properties were built before unemployment was 9 percent, before our gross domestic product began to crash and before the housing bust. Owners never anticipated a permanent drop in individual incomes that reduces consumer buying power, reduces retail prices, and crimps manufacturing activity.

Recently, the John Hancock Tower in Boston, the city's most prestigious office building, sold for $660 million, half the $1.4 billion paid by Broadway Partners in 2006. General Growth Properties, the second largest mall owner, in the United States, couldn't restructure $28 billion in mortgages and recently filed for bankruptcy because thousands of tenants couldn't meet their rent obligations.

I don't know which bank stocks you bought, so I can't tell you those to hold and those to fold.

But I can say that among the big banks that BB&T Corp. (BBT-$22.52) has 37 percent of its portfolio invested in commercial real estate loans. And I can tell you that Fifth Third Bancorp (FITB-$6.69) has 26 percent, KeyCorp (KEY-$4.78) has 25 percent, SunTrust Banks Inc. (STI-$15.45) has 20 percent and Regions Financial Corp. (RF-$4.09) has 40 percent of its portfolio in commercial real estate loans.

It's estimated that 5.1 percent of these loans are way behind on their payments and some analysts believe that number is too conservative. But none of these numbers include the industrial real estate market, which is hanging on by its fingernails and tenterhooks. Manufacturing plants, factories, industrial parks, hotels, warehouses, and assembly facilities are shuttering their doors.

It's difficult to get a solid fix on which of the commercial/industrial real estate investment trusts might be attractive survivors. An associate and co-manager of a large mutual fund thinks four issues have "dangerous but smart speculative appeal." He are his recommendations:

CBL & Associates Properties Inc. (CBL-$6.22), with an open stop order at $4.10. I expect the common stock dividend will shortly be discontinued.

FelCor Lodging Trust Inc. (FCH-$2.89). I'd buy the FelCor $1.95 Series A Convertible Preferred (FCH-A-$4.41), which could resume the $1.95 dividend by 2011 providing investors with a potential 45 percent current return.

Pennsylvania Real Estate Investment Trust (PEI-$5.63) will probably suspend or reduce its dividend soon. Use an open stop order at $4.65.

Glimcher Realty Trust (GRT-$2.72) might also eliminate its dividend. I'd place an open stop order to buy GRT at $1.70.

Be mindful that these issues are only for investors who can sing "Waltzing Matilda" backwards in Polish, teach cats to swim under water, gargle with Draino, ski uphill and whose favorite colors are putty, squant and octarine.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@comcast.net. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.