Commercial Real Estate Troubles?

Yesterday, General Growth Properties declared bankruptcy. This is the largest real estate bankruptcy in U.S. history. Among other holdings, General Growth Properties (GGP) owns the Water Tower building in Chicago and the Grand Canal Shoppes in the Venetian at Las Vegas.

These guys own a lot of property. Over $29 billion in real estate assets backed by over $27 billion in loans from people like Citigroup and Goldman Sachs. Any of those names sound familiar?

GGP is a REIT, which stands for Real Estate Investment Trust. REITs generally act llike mutual funds. People by shares in the REIT's holding on the stock exchange, and the REIT managers use the share money to buy real estate assets and manage them.

The odd thing about GGP going bankrupt is that they have good cash flow. They can pay their bills. But a number of their loans are coming due and banks won't lend them money to refinance. So in essence, GGP is going broke because too many of the loans it carries are maturing at the same time, and they had planned on refinancing them instead of paying them off. This is the credit crunch in action.

This is a case of banking risk being bigger than market risk (market risk being the risk of real estate properties getting cheaper). Unusual, but obviously not impossible. Also not a great sign that the banks are back to normal.