Chicago Illinois Real Estate Blog

Bad loans to Chicago-area real estate developers continued to pile up in the third quarter, a trend that’s expected to carry on well into next year amid the worst recession since the early 1980s.

The delinquency rate for construction loans in the area hit 13.7% in the quarter, up from 10.8% in the second quarter and more than four times the rate in the year-earlier period, according to Foresight Analytics LLC, an Oakland, Calif.-based research firm. A big chunk of the bad loans here are residential, mirroring national trends, according to Foresight.

The national delinquency rate hit 9.6%, up from 8.1% in the second-quarter and 3.2% in third-quarter 2007.

“In one sense, it’s not surprising,” says Foresight Partner Matthew Anderson, but “it still stuns us how quickly the delinquencies are mounting.”

Nearly three years into a downturn in the residential market, local developers of condominiums and single-family homes are still in the most trouble with their lenders. But more developers of retail and other commercial properties are showing signs of stress too.

Nationally, the delinquency rate for commercial construction loans rose to 5.2% in the third quarter from 4.1% in the second and 1.7% a year earlier, according to Foresight; the firm doesn’t break out its delinquency data by property type for the Chicago area.

A growing number of local single-family home and condo developers can’t pay back their lenders because they haven’t sold enough units to generate the cash. Residential developers sold just 5,952 units in the first nine months of the year, down 55% from the year-earlier period, according to Schaumburg-based real estate consulting firm Tracy Cross & Associates Inc.

The list of troubled projects includes Donald Trump’s unfinished 92-story high-rise downtown, which was financed in part with a $640-million loan from a syndicate led by Deutsche Bank AG. Unable to sell his remaining condos and hotel units, Mr. Trump failed to pay back the $334-million loan balance when it came due in early November and has sued his lenders to buy more time.

With the apartment market still in relatively good shape, some condo developers are trying to ride out the market by renting out their units — if they can persuade their lenders to go along.

Vulture investors, meanwhile, are courting the lenders aiming to buy defaulted condo loans at a deep discount. Not many are succeeding yet, says Garry Benson, CEO and president of Garrison Partners Inc., a Chicago-based real estate marketing firm.

“The bid and the ask are still too far apart,” he says. “A lot of the lenders aren’t willing to write down the loans, and they’re doing whatever they can to keep the regulators at bay.”

The wave of bad debt washing over the real estate market is prompting many real estate practitioners to reposition themselves. Garrison Partners, for instance, mainly markets condo projects on behalf of developers. But the firm recently formed the Garrison Alliance, a business aimed at helping developers, lenders and receivers deal with troubled loans on condo projects. Meanwhile, bankers who originated construction loans now are restructuring them.

“Everybody is a workout person now,” says real estate attorney Steven DeGraff, principal at Much Shelist Denenberg Ament & Rubenstein P.C.

With the economy in a recession that some expect to stretch into 2010, there will be a lot more working out to do. Though the overall delinquency rate will stabilize as more banks take bad loans off their books, “I’d be surprised if there’s any kind of a turnaround before the middle of next year,” says Foresight’s Mr. Anderson.

The commercial real estate market is likely to get worse before it gets better. Commercial developers didn’t get as carried away as their residential counterparts, so the delinquency rates for retail, office, industrial and hotel developments aren’t likely to soar to the levels seen for condos and single-family homes.

But lenders still are in for a bad year as many commercial investors struggle to make debt payments or pay off loans when they come due.

“It has become increasingly obvious that commercial real estate credit problems will finally materialize and intensify in 2009," according to a recent report by Alan Todd, head of commercial mortgage bond research at J.P. Morgan Chase & Co.

Many loans “will become a nightmare as a severely slowing economy, significantly tighter credit requirements and falling commercial real estate property prices force many borrowers to default over the coming years, or to infuse equity at the refinance date," he writes.

Source: Chicago Real Estate Daily

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