New meltdown looms as Sacramento-area commercial vacancy rate rises

From an unfinished shopping mall in Elk Grove to the ghostly quiet office parks of South Placer, the slump that has overtaken commercial real estate could rival the meltdown in the housing market.

Across the Sacramento region, vacancy rates have soared while rents and property values have plummeted, leaving many landlords struggling to pay their mortgages. A few are in bankruptcy protection.

Sacramento's troubles are worse than most, according to national analysts, but the threat looms across the entire country. With the national economy seemingly poised for a recovery, some experts fear the recession could be prolonged if commercial loans go bust like residential mortgages.

"It's very analogous to what happened with the residential market," said Mark Friedman, a prominent Sacramento commercial developer. "Money was cheap, growth was rapid, and we built a lot more product than we needed."

Others, though, say the problems in commercial don't run as deep. Most developers didn't borrow as recklessly as homeowners and are able to cushion themselves against falling revenue streams.

"People were so highly leveraged in their homes – they were borrowing against them to buy their big-screen TVs or whatever," said Mitch Derenzo, chief financial officer at American River Bank of Sacramento. "It doesn't appear that the commercial side is so highly leveraged."

But no one doubts that the problems in commercial real estate are serious. American River just reported a second-quarter loss of $704,000, its first loss in 25 years. Derenzo said the main culprit was a big leap in nonperforming commercial real estate loans – that is, mortgages that have been delinquent for at least 90 days.

So far, defaults and foreclosures on commercial loans have lagged behind the pace in the residential sector. But the most severe problems in commercial real estate lie ahead.

About $2 trillion worth of commercial mortgages worldwide are coming due in the next four years, Deutsche Bank says in a recent report. Because property values have slumped so much, hard-bitten bankers are telling borrowers to put up more cash if they want to roll over those maturing loans – a requirement that could push many property owners to the brink.

"The scale of the potential problem is formidable," says Deutsche Bank. Commercial delinquencies are already at 4.1 percent and will rise to as much as 7 percent by December, the bank says. By contrast, 9.2 percent of residential mortgages are delinquent, according to the Mortgage Bankers Association.

The California Mortgage Bankers Association said only 0.26 percent of the state's commercial property loans were delinquent in the second quarter. But market watchers say the statistics don't reflect the true problem because banks are generally being more flexible than they've been with homeowners.

In many cases, banks are extending loan maturities to avoid branding a mortgage as delinquent, analysts say – a practice known in some circles as "pretend and extend."

Bankers say they're merely taking a proactive approach to keep a bad situation from turning worse.

"You've bought yourself some time to try and improve the cash flow of that property," said Steve Fleming, chief executive at River City Bank. "I think it's fairly common practice in the industry today."

Some prominent developers haven't been able to cut deals with lenders. Kobra Properties, the Roseville firm led by Jack in the Box restaurant owner Abe Alizadeh, filed for Chapter 11 bankruptcy protection last November with debts of more than $300 million.

A key factor in Kobra's trouble: the loss of big tenants like defunct electronics chain Circuit City, according to court filings by Alizadeh.

Another victim of the downturn is Opus West Corp. of Phoenix, developer of major office parks in South Placer, the Broadstone shopping complex in Folsom and the huge Natomas Gateway office-retail center. It filed for Chapter 11 in July under a $1 billion mountain of debt.

Source Sac Bee