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Commercial Real Estate Suffering from Cash Flow Problems?
by: Tom Lindmark August 10, 2009

Maguire Properties (MPG), one of the largest office owners in Southern California is throwing in the towel on seven office buildings.

From the WSJ:


Maguire Properties Inc., one of the largest office-building owners in Southern California, is planning to hand over control of seven buildings with some $1.06 billion in debt to creditors, the latest sign that rising vacancies and falling rents are causing stress in the commercial real-estate sector.

Maguire, which borrowed heavily during the go-go years to make disastrous top-of-the-market investments, mostly in Orange County, notified the buildings’ mortgage holders Friday that it expected “imminent default” on the loans. The buildings are all worth less then their mortgages and aren’t generating enough cash to pay debt service and finance leasing expenses.


There’s a significant bit of information in this piece of news. Most of the pundits (yours truly included) have assumed that commercial real estate would implode primarily from an inability to refinance maturing debt. In the case of Maguire it looks as if the problem is simply a cash flow problem. They aren’t up against loan maturities, the buildings just aren’t viable business ventures.

If that’s the case then it might be reasonable to expect more actions like this one by other owners. Rather than a slow collapse of CRE we may be looking at it going over the cliff rather quickly. I think it’s reasonable to conclude that if a company of Maguire’s size is willing to walk that there are a number of smaller players that must be in the same boat.

It would be helpful to know a bit more about Maguire’s decision, particularly whether they and the lenders on this building tried to work out some sort of modification and failed or if Maguire simply decided handing over the keys was the best strategic decision. That sort of information would go a long way in any attempt to draw some larger conclusions from their decision.

Pending that, I expect that we can continue to see the deterioration of the CRE sector pick up steam with that attendant collateral damage to small and mid-sized banks.