The Second Wave is Coming!!!

Here in Southeastern Michigan like the rest of the nation we have seen a steady stream of foreclosures of both residential and commercial properties since 2007/8. Most of those properties tended to be smaller properties in secondary locations with landlords that were not well capitalized. We are starting to see larger properties enter the foreclosure process with some well capitalized ownership. Many of these foreclosures are as a result of overleveraged properties losing a major tenant or cross collateralized with another defaulted asset. In many of these cases the ownership has non-recourse debt and has decided not to throw good money after bad. The result is; THE SECOND WAVE IS COMING!!!

We have seen many lenders take the “extend & pretend” approach to resolving their defaulted loans by extending the terms of the loans, agreeing to forbearance agreements or by not dealing with the situation at hand. In some cases this approach has allowed the owner/borrower to find a replacement tenant or sell the property in order to resolve the situation; in other cases it has prolonged the inevitable.

With default rates on CMBS loans hitting 12.9% during second quarter 2011 and banks following suit, we have not seen the light at the end of the tunnel. There are a significant number of loans with principal balances in excess of the property’s current value; until property values return to their former levels or these loans get resized, we will continue to see the default levels we have grown accustomed to.

While the world economy continues to sputter along, Michigan was third highest in job growth during June behind the much larger economies of California and Texas. This is a direct result of the continued rebound to the domestic automobile industry. Each of Detroit’s Big Three posted Second Quarter profits, Ford $2.4 billion, General Motors $2.5 Billion and Chrysler $320 million and have announce new hiring programs in the past 90 days. This trend does not stop with the automotive industry; Troy based staffing companyKelly Services Inc.reported a jump in revenue and earnings for the second quarter. Kelly reported second quarter revenue of $1.4 billion. This represents a 16 percent increase from $1.2 billion in the second quarter of 2010.

The world’s economies continue to provide concern and uncertainty for consumers and business owners alike. We have seen the economic tsunami hit in 2008/9 and if the World’s economies continue to falter, we will know that THE SECOND WAVE IS COMING!!!