Now for commercial property problems .
edited for spelling errors by myself sorry the Australian
http://www.theaustralian.news.com.au/story/0,25197,23069027-36375,00.html
Crunch hits US commercial property
Jennifer S. Forsyth, Michael Corkery and Tamara Audi | January 18, 2008
THE credit crunch roaring through the US residential real estate market is starting to bite commercial projects, too.
Ian Bruce Eichner, the developer of a twin-tower casino resort in the heart of Las Vegas, on Wednesday defaulted on a $US760 million ($864 million) loan from Deutsche Bank after he failed to get refinancing.
The default on the loan supporting the $US3 billion Cosmopolitan Resort Casino is a signal of trouble for Mr Eichner, who gained notice during an earlier real estate downturn in the early 1990s when he lost several projects in New York City.
Owners and developers of some of the country's choicest properties are having trouble refinancing shorter-term loans they received during the boom days.
Recent casualties include Centro Properties Group of Australia, one of the largest owners of shopping centres in the US. Its stock has sunk because it cannot refinance $US3.4 billion in short-term debt. Also, New York developer Harry Macklowe, who bought a group of Manhattan office buildings last year at the top of the market, is struggling to repay some $US7 billion in debt that comes due in February. Mr Macklowe just put his prized General Motors Building in central Manhattan on the block.
During the boom, investment banks made loans for both commercial and residential properties, quickly packaged them into securities and sold them to investors. Five months ago, the market for securities backed by sub-prime home loans seized up as defaults by these less creditworthy borrowers surged. The sub-prime problem is at the heart of huge write-downs on Wall Street, where the toll is set to pass $US100 billion.
Now the same system is breaking down in commercial property, because few investors want securities backed by loans to commercial real estate owners. Moody's Investors Service warned last week that the corporate default rate for the construction and building industry could reach 12 per cent this year and predicted a 6 per cent default rate in the hotel, gaming and leisure industries.
Mr Eichner yesterday received a notice of default on the $US760million loan, which came due early on Wednesday. He had failed to obtain refinancing to pay back the loan. The default triggered technical defaults on additional debt totalling $US175 million.
Mr Eichner may still succeed in finding new investors, something he has been struggling to do for weeks. Work is continuing on the 3000-room casino and hotel, which is scheduled to open in late 2009, according to a spokesman for the casino. He said he didn't know whether it would be halted by the default action.
Mr Eichner released a statement blaming "current challenges within the real estate and debt capital markets which are out of our control". He said he was working with Deutsche Bank and Merrill Lynch on raising new equity. "This action by our lender comes as no surprise," he said. Deutsche Bank and Merrill Lynch declined to comment.
The Cosmopolitan includes 2184 "condo hotel" units, which are condominiums that typically get rented out as hotel rooms. During the housing boom, speculators in cities such as Las Vegas, Miami and San Diego snapped up these units because they promised to rise in value while also producing rental income.
Lately, investors have soured on condo hotels. In Las Vegas, a group of buyers are suing a development partnership behind the Signature condo-hotel project, claiming room rates aren't as high as promised. A spokesman for MGM Mirage, now the operator of the project, denied promises were made about the rates.
The Cosmopolitan spokesman said 84 per cent of the condo-hotel units had been sold. "It's a successful offering," he said.
The Cosmopolitan is designed to include a high-rise hotel tower, to be managed by Global Hyatt as a Grand Hyatt, as well as another tower with the condo-hotel units.
Mr Eichner's problems come as Las Vegas is in the midst of an unprecedented construction boom that is affecting nearly every corner of the Strip, the central thoroughfare that is lined with hotels and casinos.
The Venetian, a lavish casino hotel, is holding a grand opening this week of a $US2 billion addition called the Palazzo. MGM Mirage's massive CityCentre project promises to transform a large chunk of the Strip with residential properties and non-casino luxury hotels. Some $US35 billion of new construction is planned or under way in Las Vegas, according to the Las Vegas Convention and Visitors Authority. That is expected to produce about 40,000 new hotel rooms by 2012.
However, some projects are being delayed or getting cancelled as financing dries up and the housing market slows. Plans to renovate the legendary Las Vegas Tropicana are on hold after the casino's owner, Kentucky based Columbia Sussex, had troubles with a casino in Atlantic City.
Mr Macklowe and Mr Eichner both have histories of living on the edge. Mr Macklowe lost the Hotel Macklowe near Times Square and at least two other properties in the real estate bust of the early 1990s, while Mr Eichner lost a series of buildings, including two New York skyscrapers. His saga was portrayed in a 1993 book by Jerry Adler: High Rise: How 1000 Men and Women Worked Around the Clock for Five Years and Lost $200 Million Building a Skyscraper.
Mr Eichner began his comeback in Miami with a South Beach condominium project that was recently completed.
Then he turned his attention to Las Vegas. Unlike many projects on the Strip that raise money via public stock or bond markets, the Cosmopolitan is privately owned and financed.