Another cascade of business bankruptcies in the housing, retail and commercial real estate sectors could happen during the next six to 12 months if consumers' confidence doesn't improve soon, both in terms of the economy and their personal finances.
However, the likelihood of that happening appears slim, based on the dismal assessment of current and future market conditions by three real estate experts during an hour-long teleconference yesterday presented by the American Bankruptcy Institute.
“Asset and price recovery are several years away” for the housing industry, predicts Rebecca Roof, a managing director with the New York-based business advisory firm AlixPartners. During her comments, Roof dredged up the usual suspects behind housing’s deterioration (price appreciation, overbuilding, lax mortgage underwriting), and added another co-conspirator: consumer confidence, or lack thereof.
“It’s not a pretty situation when you layer on consumer confidence,” which fell to an all-time low in October, Roof observes.
Consequently, she says, many builders “are just trying to find enough cash to make it” through the downturn, which is why when builders finally decide to file for creditor protection under Chapter 11, “they are really at the point of liquidation." And with so many banks having their own financial and corporate problems, she says “it’s hard to get their attention” to renegotiate debt or new financing.
Greg Apter, a principal with Chicago-based Hilco Real Estate, the restructuring consultant, notes that the retail industry, which has seen several high-profile companies file bankruptcy in recent months, is reeling in part from a housing downturn that has depleted consumers’ perception of their own wealth. The credit crisis is dramatically curtailing the availability of consumer credit, which in turn has caused customers to scale back purchases.
Apter projects that by the summer of 2009, 100 million square feet of retail space will have come back onto the market over a 12-month period because of retail bankruptcies and liquidations. And if sales don’t start improving soon, “there’s going to be a quite a few more bankruptcies and foreclosures, and a growing willingness among lenders to take back leases," he says.
The housing and credit crises have manifested themselves on a larger economic scale in the rising unemployment rate. That statistic in November stood at 6.7 percent, and many economists are predicting it could increase to 8.5 percent sometime in 2009. “There’s been a retrenchment among lenders, so real estate transactions have largely dried up,” explains Harold Bordwin, Managing Director and Group Head with KPMG Corporate Finance. That means more professionals—at banks, accountancies and law firms—are being laid off and the demand for office space has been dwindling. Bordwin says that his firm, which provides workout, restructuring and liquidation advice, is “pessimistic about the values of office space” going forward, including the demand for retail and warehouse distribution space.
All three panelists don’t see much immediate improvement for their respective spheres of influence. “Home building is going to be a very tough, wounded sector for many months to come,” says Roof. “We have not seen the bottom yet, and if consumer confidence continues to erode, home building will not enjoy its traditional spring rebound.”
While she doesn’t expect any sustainable recovery for the next 24 to 36 months, Roof says builders’ survival will be contingent on realistic sales projections and asset valuations. “They will need good, early communication with lenders before they trip a covenant, and they need to make sure that all available cost reductions are made in ways that protect banks’ value.
Both Roof and Bordwin indicate that even distressed builders have some leverage with their lenders. After all, few lenders want to get stuck with more real estate or end up behind lien holders waiting to get paid in this economy.
“Home builders will be able to wait out [the recession] if they can negotiate forbearance with lenders,” says Roof. However, she also thinks that “a lot” of small builders will eventually liquidate, which would open the doors for developers with cash to pick up land bargains.
John Caulfield is senior editor at BUILDER magazine.
Learn more about markets featured in this article: Chicago, IL.