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CHICAGO-Defaults are at an all-time high; particularly in the Chicago area and Midwest. Residential has led the way, but a few sectors of commercial real estate have not seen dramatic increases in defaults. Local experts are not expecting to see an end in sight until late 2009 or early 2010.

“Whether it is single-family residential (or) condominium residential, some form of residential clearly was kind of the first domino that fell in the path,” says Donald Shapiro, president and CEO of Foresite Realty Partners LLC. “Since then, I think the number of defaults have escalated into a significantly greater portfolio of commercial properties.”

The one area the residential sector that has not been as impacted is multifamily rental residential properties, says Larry Silberman, SVP and department manager for Fifth Third Bank Chicago’s real estate department.

Foresite, which has an owned real estate portfolio in addition to performing third party services such as receivership, has noticed that the court systems have been overwhelmed with foreclosures. “Clearly, the Midwest has been pretty significantly impacted,” Shapiro says.

The amount of defaults is more than it has been “since the last down cycle, which was 2001,” Silberman says. “I think this is unique by comparison to 2001 because there is such a dearth of capital available,” he says. “There is not any type of potential CMBS execution available which was available the last down cycle.”

The percentage of loans that are defaulting has decreased, but there are a larger number of loans, meaning that the overall number of defaults is higher, Shapiro says. “The percentage is obviously much less than at the height seven or eight years ago,” he says.

Retail has been hit with a flurry of companies filing for Chapter 11 and “in some cases, going completely out of business,” Shapiro says. “Consumer spending is down (and) consumer optimism is way down,” he says. People have had less disposable income, particularly with fuel prices increasing. “People are making some very, very difficult choices,” Shapiro says. “And, many things retailers sell are wants, not needs.” As people are spending less money on “wants,” retailers and manufacturers are cutting back and laying people off. As major and big box retailers flounder, it has a type of rippling effect on the shopping centers where they are anchors or major tenants. “Many malls put them in at a loss to generate traffic,” he says. One example of this is Steve & Barry’s, “a very, very strong discount sports retailer,” which may end up filing for Chapter 11 if they can not find $30 million in funding, Shapiro says. A number of media reports last week detailed the retailer’s problems. A company official did not return a call for comment.

While hospitality was hit significantly after Sept. 11, 2001, the hotel industry has not seen the number of defaults as other areas of commercial real estate, Shapiro says. Hospitality as well as industrial “appears to have continued to weather the storm,” he says. Industrial properties, “especially new buildings in central locations,” are performing well, he says. Industrial buildings cost less to build as well as “less labor costs (and) less utility costs,” leaving more wiggle room to create a profit, Shapiro says. The office sector did not initially appear to be impacted but there have been a significant number of job layoffs, Shapiro says. The office market is just starting to be hit with defaults, he says. Shapiro expects the number of defaults to increase for another 12 to 18 months, and possibly as much as 24 months.

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