Matt Yglesias

What Happens When CRE Goes Bust?

The McClatchy story about the looming financing crisis in the commercial real estate market is very interesting. At the same time, the accompanying chart seems to indicate that the financial consequences, as such, of CRE-related losses will be less severe than the consequences of the collapse in the residential housing market. Not because the situation is necessarily better, but just because the scale of the loans involved is smaller.

But here’s my question. What happens to the tenants when you have CRE foreclosure? I read this:

The reality is already on display. On April 16, the nation’s second largest mall developer, General Growth Properties, filed for bankruptcy protection. The Chicago-based company owns more than 200 malls across the U.S., and was unable to renegotiate its debts as they came due.

Six days later, a 40-story office tower on New York’s Avenue of the Americas was seized by its creditor, a Canadian-owned pension fund. The tower’s owner, Macklowe Properties, couldn’t meet loan terms.

Presumably, vacancies at the General Growth malls and the office building on Sixth Avenue were part of the issue in the owners’ inability to pay their debts. But at the same time, it’s presumably not the case that all 200+ General Growth malls are uniformly empty. Same with the office building in Manhattan. So what happens to you if you’re running a store or a restaurant or a company and the owner of the office building or mall you lease from goes bankrupt?