Commercial Loans Threaten a Second Wave of Foreclosures

By Odette Yousef

Atlanta, GA – The Trump Towers luxury condominiums in Midtown are the latest major commercial real estate casualty in Atlanta. Last week, the site for the project was listed as a foreclosure.

Up until now, many distressed loans on office, retail, and condo buildings in Atlanta have defaulted, but few have gone into foreclosure. But the news about Trump Towers has resuscitated fears that a second wave of the mortgage crisis is on the horizon: this one caused by commercial loans.

One person who's already been affected by stress in the commercial market is Joe Cressaty. He owns the Say Hey Deli in Midtown's Macquarium office building on Peachtree Street.

"Our sales are down 30 percent off last year," Cressaty says. "So we've been hit pretty hard."

As he grills chicken in the back of the small restaurant, preparing for the noon lunchtime trickle, Cressaty recalls better days. When he opened the sandwich shop two years ago, the area was primed for development. New condos were going up nearby and he was optimistic about what that meant for customer traffic.

"We had hoped that when they were done building that people would move in," says Cressaty, "but they haven't sold a single unit. And the construction crew is gone now, so kind of a double whammy there, you know."

Add to that the fact that businesses in the four office buildings he caters to have lost employees or closed shop. Cressaty suspects he'll be closing, too, at the end of the year.

But just up Peachtree Street, as you move into Buckhead, things get worse. Andy Feinour, senior vice president of advisory services for Carter Commercial Real Estate, surveys the Buckhead skyline from his midtown office tower. He easily picks off the buildings that are in trouble with their mortgages.

"From an office perspective, of those 16 or so tall buildings you've got four of them that are new, and basically vacant," says Feinour. He also points to several new condo buildings that sit empty. Feinour says that many of these and the office buildings are already in default.

The buildings were built in the peak of the market when land and construction costs were high, which required huge loans. At the time, that seemed OK, says Feinour, because office rents were higher than they are now.

"Even when they weren't filled, the borrowers could afford to keep those loans," Feinour explains. "But the terms are coming up and between today and 2013, all of those loans were maturing in some form or fashion."

With less rent coming in, it's impossible for building owners to pay off the huge loans. Feinour says ultimately, the banks will have to admit they'll never get paid back what they put in. But so far, he says, they've been dragging their feet.

"Everything's just getting delayed, delayed, delayed, delayed," says Feinour. But he adds, that hurts everyone. "They're making it more difficult for the average person to go to that bank and do business."

That's because when banks have lots of bad loans on their books, they're forced to shore up their reserves, tying up their money. So the $20,000 car loan, or $100,000 home mortgage that the average person might need will have a tougher time getting it.

Harvard Law School Professor Elizabeth Warren predicts things will even get worse once the banks admit their losses. Warren heads a congressional oversight panel that came recently to Atlanta to assess just how bad the picture is.

"These mortgages are going to fail, and they're already starting to fail," says Warren. "And we fear we're going to see more failures in 2011, 2012, 2013. We're only on the front end of this crisis."