Mall owner fell victim to risky moves, bad times

The historic bankruptcy filing by General Growth Properties on Thursday reflects both risky business decisions by the nation's second-largest mall owner, and a rapidly deteriorating outlook for commercial real estate, analysts said.

The stunning announcement — the largest real estate bankruptcy filing in the nation's history — was due in part to General Growth's strategy of taking on debt to acquire other companies. The Chicago-based firm said in its Chapter 11 filing it had assets of $29.6 billion and debts of $27.3 billion. Its high-profile properties include New York's South Street Seaport and Boston's Faneuil Hall Marketplace.

Jim Sullivan, managing director at Green Street Advisors, an independent real estate analysis firm, called the General Growth filing "largely a self-inflicted event" and noted that many other real estate firms aren't as highly leveraged. Still, Sullivan said the filing is just the start of what is likely to be a much larger shakeout in commercial real estate.

Delinquencies on commercial real estate loans held by banks doubled to 5.3% by the end of 2008, while the number of loans being charged off was the highest since 1994. Property values, which soared in the past decade, are falling.

Developers built too many malls, hotels and office buildings. The poor economy is hurting retailers, while constricted financial markets are making it difficult to restructure debt or get new financing.

At the same time, the market for commercial mortgage-backed securities has essentially dried up.

While the Federal Reserve has announced a program to revive bond issuance, it hasn't begun. Even if the Fed is successful, it could take years for commercial real estate to recover.

"This is one of the last sectors to go into recession," says Patrick Newport, an economist at IHS Global Insight. "There's nothing the Fed or the administration can do to prevent a lot of pain. You had overbuilding. You need to have this adjustment period."

Standard & Poor's in a recent report said 2008 marked the first time in six years during which more commercial mortgage securities were downgraded than were upgraded. McGraw-Hill Construction expects commercial building to decline by 27% in 2009, after sliding 17% in 2008.