by Calculated Risk on 7/08/2008 09:00:00 PM

From the WSJ: Steve & Barry's Nears Bankruptcy

Fast-growing retailer Steve & Barry's is expected to file for Chapter 11 bankruptcy protection as early as Wednesday ... A filing would be devastating to mall owners across the country, who ponied up hundreds of millions of dollars to attract Steve and Barry's into huge, empty spaces often as large as 100,000 square feet. Potentially all of those 275 stores could close ...

Steve & Barry's was the retailer we discussed a few weeks that was using up-front fees from mall owners to fuel their rapid expansion:

People close to the company's finances say most of the retailer's earnings came in the form of one-time so-called "tenant improvement" payments from landlords of $2 million to $7 million per store.

This is another major blow to already reeling mall owners. Just today Reis announced that the strip mall vacancy rate climbed to 8.2% in Q2 2008, the highest vacancy rate since 1995.

And just like for residential, there was substantial overbuilding in multimerchandise shopping space in recent years (graph repeated from earlier post).

Note that multimerchandise investment peaked at $32 billion SAAR (seasonally adjust annual rate) in Q4 2007, compared to $800 billion for residential investment (SAAR) in Q1 2006. So the scale of the problem is much smaller.

Click on graph for larger image in new window.

This graph shows investment in multimerchandise shopping space starting in 1997 in current dollars (inflation adjusted Q1 2008). The circle shows the probable period of overinvestment.

It appears that $20 billion per year or so would be a normal level of investment. However, with the recent over investment, non-residential investment in multimerchandise shopping structures will probably fall below $20 billion per year (in 2000 dollars) for a few years.

by Tanta on 7/08/2008 07:44:00 PM

July 8, 2008, via Housing Wire:

According to a press statement released late Tuesday, Northbrook, Ill.-based Prospect Mortgage has signed an agreement to acquire more than 60 branch offices nationwide and 750 of Indymac’s retail employees, including loan officers. Terms of the deal were not disclosed.

The employees will become Prospect mortgage employees, with the branches being renamed, the company said; it’s unclear if the company intends to cut staff in the wake of the planned acquisition.

Both John Johnston and Ron Bergum will remain in their leadership roles with the retail branch group and report to Mark Filler, CEO of Prospect Mortgage; both Johnston and Bergum were senior retail banking executives at now-bankrupt American Home Mortgage Co. before joining Indymac.

August 29, 2007 via Bloomberg:

One mortgage lender announced that it was hiring yesterday as it tried to take advantage of the turmoil in the market, while another said it was cutting jobs.

IndyMac Bancorp said it had hired more than 600 former employees of the American Home Mortgage Investment Corporation and might hire 250 more.

IndyMac will also assume the leases on more than 90 offices where the employees worked.

Last month, IndyMac eliminated 400 back-office processing jobs, about 4 percent of the work force.

This year’s surge in missed loan payments reduced the profitability of home lending, forcing more than 100 mortgage companies to close, declare bankruptcy or put themselves up for sale. IndyMac joins Countrywide Financial and Merrill Lynch’s First Franklin unit in trying to benefit from the shake-out by hiring displaced workers.

Hope Prospect Mortgage's business cards are handled on a print-on-demand basis. I'm not sure I'd stock up.

by Calculated Risk on 7/08/2008 05:25:00 PM

From the BBC: Recession 'looming' for UK firms

The UK is facing a serious risk of recession within months, the findings of a survey of almost 5,000 small, medium and large businesses suggest.

The British Chambers of Commerce's (BCC) quarterly report found the credit crunch and rising costs had dented the most important sectors of the economy.
...
Firms in the manufacturing and services sector said domestic sales and orders had slowed over the past three months, said the BCC, which added that firms were also experiencing serious cash-flow problems.

Its economic adviser, David Kern, said the survey showed a "menacing deterioration" in UK prospects.

"We are now facing serious risks of recession," he said.

"The outlook is grim and we believe that the correction period is likely to be longer and nastier than expected."

Here is a video of Director General of the British Chamber of Commerce David Frost on economic downturn.

by Calculated Risk on 7/08/2008 02:55:00 PM

From Bloomberg: SEC Probe of Raters Reveals Conflicts in Grading Debt (hat tip DD49)

A U.S. Securities and Exchange Commission investigation into credit-rating companies found the firms improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.

What a surprise. And the article provides this email:

The SEC report details an e-mail in which an analyst at an unidentified credit-rating company refers to the market for collateralized debt obligations as a ``monster.''

``Let's hope we are all wealthy and retired by the time this house of cards falters,'' said the e-mail, which was sent Dec. 15, 2006, to another analyst at the same firm.

Nice.

by Calculated Risk on 7/08/2008 02:00:00 PM

From the WSJ: Lacker to Fed: Don’t Wait Too Long on Rates

In response to questions following a speech to the National Economists Club, Lacker said it is “tempting” for policymakers to wait until there is a “fair amount” of certainty on the economy before raising rates. However, it is easy to make the “mistake” of waiting too long, Lacker added.

Note that Lacker isn't a voting member of the FOMC this year, and he frequently dissented (preferring higher rates) in 2006.

Here is Lacker's speech: The Economic Outlook.

by Tanta on 7/08/2008 12:47:00 PM

You really want to watch this CNBC video interview with OFHEO's Director James Lockhart. Although you won't get an answer to one nagging question--who let that man out of the house in that shirt with that tie and that jacket?--you might enjoy Lockhart's dogged ability to keep making calm answers to increasingly hysterical questions.

by Calculated Risk on 7/08/2008 12:20:00 PM

The Greenbrier Companies (GBX) designs, manufactures, and markets railroad freight car equipment. On their conference call today, Dow Jones reports:

Greenbrier CEO Says U.S. Railcar Market 'Stinks'

by Calculated Risk on 7/08/2008 10:20:00 AM

From Reuters: US retail property 2nd-qtr worst in 30 yrs - report

U.S. store closings and cutbacks turned the second quarter into the worst for strip mall owners in 30 years ... according to a report by real estate research firm Reis. Strip malls ... saw average vacancies spike 0.5 percentage points to 8.2 percent, a level unseen since 1995 ...

Vacancies at regional malls rose 0.4 percentage points to 6.3 percent, the highest level since the first quarter of 2002, according to the preliminary results.

Click on image for larger graph in new window.

This graph shows the strip mall vacancy rate since Q2 2007. Note that the graph doesn't start at zero to better show the change.

It was just last quarter that Reis forecast the strip mall vacancy rate to "reach or surpass" 8% by the end of 2008! I guess that forecast needs to be revised.

And it will get worse. As an example these numbers don't include the impact of the recent announcement by Starbucks to close 600 stores and scale back expansion plans. The CRE bust is here.

by Calculated Risk on 7/08/2008 10:01:00 AM

From MarketWatch: Pending home sales index down 4.7% in May: NAR

From the NAR: Home Sales to Vary in Narrow Range, Then Rise in Second Half

The Pending Home Sales Index,* a forward-looking indicator based on contracts signed in May, fell 4.7 percent to 84.7 from an upwardly revised reading of 88.9 in April, and remains 14.0 percent below May 2007 when it stood at 98.5.

by Calculated Risk on 7/08/2008 09:16:00 AM

Fed Chairman Bernanke spoke today on Financial Regulation and Financial Stability

From Bloomberg: Bernanke Says Fed May Extend Wall Street Lending Access to 2009

The Federal Reserve may extend securities dealers' access to direct loans from the central bank into 2009 as long as emergency conditions ``continue to prevail,'' Chairman Ben S. Bernanke said.
...
Bernanke also endorsed proposals to set up a federal liquidation process for a failing investment bank. The Treasury should ``take a leading role in any such process, in consultation with the firm's regulator and other authorities,'' he said.

In general Bernanke argued the Fed needs more authority to provide proper oversight for the financial system.