General Growth Properties (GGP), the big mall operator, will file for Chapter 11. According to The Wall Street Journal, which broke the story, "Many analysts suspect General Growth will survive a lengthy bankruptcy intact, but perhaps smaller after selling properties, without resorting to liquidation."
That may be so, but some big commercial banks could face large write-downs from their exposure to General Growth if a bankruptcy judge voids or cuts down the value of any of the company's debt obligations. General Growth says that it has about $24 billion in debt.
The most obvious question to arise from the General Growth bankruptcy is how many more commercial real estate debt defaults are in the offing. The answer is almost certainly a very large number. But since it is hard to define the scope of the problem, it is impossible to tell how badly already weakened banks will be hit as property owners collapse.
There is a very good chance that commercial real estate is the next big wave that will buffet the banks following on trouble with toxic assets and consumer credit. As retail sales continue their sharp decline, the number of store closings in the United States will certainly climb. Business tenants in large office buildings, many of which have big mortgages given to them three or four years ago in the real estate boom, are facing a fall-off in sales. That means more lease defaults and fewer new tenants to replace those who leave.
Banks have tens of billions of dollars in write-offs coming over the next few quarters as the commercial real estate market craters.
Douglas A. McIntyre is an editor at 24/7 Wall St.