19 May 2009 – We are recommending that you cautiously float as mortgage interest rates test a definite strong level of support. Today, housing starts were reported significantly lower than expected, down 12.8% to 458,000 units from the expected level of 520,000! This is the lowest number of housing starts since January 1959, over 50 years ago. While the number is significantly lower than expected, it can actually benefit us in that it will give us an opportunity to deplete some of the existing inventory. On another note, three month LIBOR fell to 0.75%, down from a high of 4.81% back in October 2008. This can definitely be seen as a reflection of increased liquidity in the financial sector. We’ve also seen banks like JP Morgan, Morgan Stanley, and Goldman Sachs have recently applied to repay approximately $45 billion in TARP funds. All of these indicators point to perhaps a long-awaited turn in our economic forecasts. So for now we recommend a floating position.

Locked

The AP is reporting that 2009 is likely to be a difficult year for commercial real estate. Real Capital Analytics is quoted as saying that $25.7 billion of commercial property are currently bank-owned or in default. They are projecting that this number will likely more than triple in 2009 to $80.9 billion.

At least part of the situation is rooted in the credit crisis and the lack of available capital. Marcus & Millichap Real Estate Investment Services and National Real Estate Investor magazine surveyed 1,100 investors in October and found that 40 percent would need to refinance at least part of their portfolios this year. However, an appeal by a commercial trade group to the Bush administration to be included in the $700 billion bailout (TARP) has not yet been answered by the Treasury Department.

On top of financing problems, there is a drop in demand for store space due to so many retailers going out of business. Marcus & Millichap are expecting an 11 percent vacancy rate this year. This is, of course, going to put downward pressure on rent rates. It looks like 2009 will mark the beginning of a market where tenants are going to have the upper hand over landlords in negotiations.

High vacancy rates, lower rents, and tight credit are all a recipe for a very difficult time for commercial landlords.

It only takes a short walk near my Lakeview home, along the commercial streets of Halsted and Broadway to see that this will hold true for Chicago as well. The demise of large tenants like Linens ‘n Things are going to gaping holes in shopping districts. But equally disturbing is the rise in the number of soaped up windows that were once little boutiques, inviting galleries, and glittering knick knack shops. As I walk by the still open, but all-but-empty little stores, I can only imagine that there will be many more papered windows in my neighborhood soon.

TARP Money for Private Chicago Banks

On December 23rd, The Treasury Department released the details (PDF) of a $2.8 billion investment in 49 local banks. On the list were three private Illinois banks, all of which are headquartered in Chicago suburbs, but do much of their business in Chicago. They are the first private Chicago banks to receive federal funds under the Troubled Asset Relief Program (TARP).

Marquette Bank (10000 West 151st Street, Orland Park, IL 60462) received $35.5 million on Dec. 19. Crains Chicago Business reports that Paul McCarthy, CEO of Marquette National Corp., Marquette Bank’s  parent company, says that they currently have $1.6 billion in assets and feels they are well capitalized without the funds. However, he says the funds allow them to handle, “the most extreme contingencies.” He also expressed interest in buying troubled assets from other banks, but no interest in buying whole banks.

Bridgeview Bank (7940 S Harlem Ave, Oak Lawn, IL 60455-1500) received $38 million. Bridgeview Bank has 15 branches, 11 of which are in Chicago. According to its website, “In addition to its core banking operations, Bridgeview Bank Group operates Bridgeview Capital Solutions (BCS) in Atlanta, Georgia. BCS is one of the nation’s largest government guaranteed specialty lenders serving businesses, co-operatives and community banks in non-urban areas. The bank also operates Bridgeview Commercial Finance (BCF), a nationwide asset-based lending, factoring and lease company and AirBanker, an aircraft financing, appraisal and consulting business.”

The largest recipient of TARP funds was Wintrust Financial Corporation, getting $250 million. Wintrust is a financial services holding company headquartered in Lake Forest, Illinois. They are quite large with assets over $9 billion. Most of its long list of banks it operates are in the Chicago area: Lake Forest Bank & Trust Company,  Hinsdale Bank & Trust Company, North Shore Community Bank & Trust Company, Libertyville Bank & Trust Company, Barrington Bank & Trust Company, N.A., Crystal Lake Bank & Trust Company, N.A., Northbrook Bank & Trust Company, Beverly Bank & Trust Company, N.A., Wheaton Bank & Trust, and St. Charles Bank & Trust

All together these three Chicago institutions received $323.5 million or 11.5% of money thus far going to local banking institutions.