by Calculated Risk on 12/07/2009 09:26:00 PM

From Thomas Corfman at Crain's Chicago Business: Zombie fears stalk Tishman in the Loop (ht David)

Corfman describes properties where the owners owe far more than the buildings are worth, and can't refinance, as "zombie buildings". The owners "can't compete for new tenants because they lack the money to cover brokers' commissions and interior office reconstruction."

"Virtually all the assets bought between '05 and '07 cannot be refinanced today without a significant capital infusion," says Shawn Mobley, executive vice-president at real estate firm Grubb & Ellis Co. "These buildings need to be recapitalized to get back in the business of being active real estate."
...
The number of zombie buildings in the Chicago area is likely to grow in 2010 ... For landlords, the trend means even top-quality office properties are likely to divide themselves into "haves" and "have-nots," with the latter seeing their vacancy rates worsen because of the lack of financing.
...
Many tenants won't consider zombie buildings because they need landlords' cash [for tenant improvements].

An "extend and pretend" loan modification will just let the zombie building live longer with deferred maintenance and few tenant improvements.

Although Corfman is discussing commercial office buildings, the same idea applies to residential real estate and loan modifications. Homeowners with significant negative equity own zombie houses - the "owners" are really renters and will defer maintenance as long as possible.