Those who thought “Las Vegas Is Different” are finding out otherwise.

Las Vegas Default Highlights Commercial-Property Crunch.

The credit crunch that roared through the residential real-estate market is starting to bite commercial projects, too.

Yesterday, Ian Bruce Eichner, the developer of a twin-tower casino resort in the heart of Las Vegas, defaulted on a $760 million loan from Deutsche Bank AG after he failed to get refinancing. The default on the loan supporting the $3 billion Cosmopolitan Resort Casino is a signal of trouble for Mr. Eichner, who gained notice during an earlier real-estate downturn in the early 1990s when he lost several projects in New York City.

Recent casualties include Centro Properties Group of Australia, one of the largest owners of shopping centers in the U.S. Its stock has sunk because it can’t refinance $3.4 billion in short-term debt. Also, New York developer Harry Macklowe, who bought a group of Manhattan office buildings last year at the top of the market, is struggling to repay some $7 billion in debt that comes due in February. Mr. Macklowe just put his prized General Motors Building in midtown Manhattan on the block.

The Cosmopolitan includes 2,184 “condo hotel” units, which are condominiums that typically get rented out as hotel rooms. During the housing boom, speculators in cities such as Las Vegas, Miami and San Diego snapped up these units because they promised to rise in value while also producing rental income.

Some $35 billion of new construction is planned or under way in Las Vegas, according to the Las Vegas Convention and Visitors Authority. That is expected to produce about 40,000 new hotel rooms by 2012.

Messrs. Macklowe and Eichner both have histories of living on the edge. Mr. Macklowe lost the Hotel Macklowe near Times Square and at least two other properties in the real-estate bust of the early 1990s. Mr. Eichner lost a series of buildings, including two prominent New York skyscrapers, in that period. His saga was portrayed in a 1993 book by Jerry Adler: “High Rise: How 1,000 Men and Women Worked Around the Clock for Five Years and Lost $200 Million Building a Skyscraper.”

Canada CMBS Sector is “Effectively Shut Down”

ReportOnBusiness is noting a Credit Crunch Casualty in Canada.

The credit crunch has spread to a new sector of the domestic fixed-income market. Canada’s $4-billion commercial mortgage-backed securities (CMBS) sector is “effectively shut down,” the words of TD Securities fixed-income strategist Sheldon Dong, as financial firms close their operations.

One of the largest dealers involved in Canadian commercial mortgage securitization, Merrill Lynch, cut 25 per cent of its CMBS staff last week, the TD analyst said in a report late Monday. He did not say how many jobs were lost.

The downsizing came on the heels of total retreat from the domestic CMBS market by two other major players: A unit of Credit Suisse and Capmark Canada, a global commercial real estate finance company.

Shutting down CMBS teams in Canada is the latest sign that credit woes rooted in the U.S. subprime residential mortgage market continue to spread.

Focus On Deal Making

Financial Week is looking at Four deals that will define ’08. Our interest is on the first one.

1. Blackstone Group’s (BX) $26 billion LBO for Hilton Hotels

A $9 billion issue will have the market checking into (or out of) commercial mortgage-backed securities

Looming in the first quarter is the flotation of roughly $20 billion in single-issuer commercial mortgage-backed securities to support the buyouts of Hilton Hotels, Harrah’s Entertainment, Manor Care and La Quinta.

Having already been saddled with write-downs on residential mortgages and leveraged loans, banks may be forced to take hits on CMBS as well if they can’t find buyers for the securities. It’s particularly worrisome that no single-issuer CMBS have been brought to market since August, so there are no assurances of how receptive buyers will be. Worse, just last week Moody’s Investors Service reported that several commercial property types, including limited and full-service hotels, softened in the fourth quarter.

So all eyes are on the $9 billion CMBS offering that supports the $26 billion leveraged buyout of Hilton Hotels by the Blackstone Group-controlled BH Hotels, which closed in October. The deal would be the largest CMBS issuance ever and is being led by Bear Stearns (BSC) , Bank of America (BAC), Deutsche Bank (DB), Goldman Sachs (GS) and Morgan Stanley (MS).

The deal commitment comes at a particularly precarious time for Bear Stearns. The bank wrote down $1.9 billion in mortgage investments in the fourth quarter, leading to its first ever quarterly loss. And just last week James Cayne, its legendary CEO for the past 14 years, relinquished his title and active management responsibilities.

Analysts have already raised concerns over Bear’s involvement in commercial real estate. “Bear is exposed to risks in its commercial real estate,” Moody’s said in a news release last month, noting what it called “Bear’s concentrated risk from its participation in the $26 billion Hilton leveraged buyout transaction. This exposure is also large relative to the firm’s earning capacity and capital position and is another example of an elevated risk appetite at the firm.”

New Supply Meets Slack Demand

Caroline Baum was talking about commercial real estate in Recession Theorists Confront Recession Reality.

What will the 2008 recession look like? Driven by home loan defaults, falling home prices and cascading credit problems at financial institutions that have the potential to curtail lending to the rest of the economy, the recession may look something like the one in 1990-1991, which came on the heels of the savings and loan crisis.

It was commercial, not residential, real estate that was the villain back then, with banks and thrifts overextending themselves into areas they knew little about.

“Excess real estate lending, powered by rapidly rising rents and prices, rapidly occurred worldwide,” said William Seidman, former chairman of the Federal Deposit Insurance Corp. and Resolution Trust Corp., the agency created to clean up the mess, at a 1997 symposium on the history of the ’80s. “But more than anything else, real estate lending became the fashion, the new banking idea of the times.”

The old maxim that retail development follows new housing is about to be tested in a case of new supply meets slack demand.

The Wall Street Journal reported last week that since 2005, “developers in the U.S. have produced more retail space than office space, rental apartments, warehouse space or any other commercial real estate category.”

Projected retail demand “will justify only 43 percent of the new space delivered this year and last,” the Journal said, citing market-research firm Property & Portfolio Research Inc.

If lending standards to business were anything like those used to evaluate potential homeowners, there’s going to be a lot of empty mall space across the country.

Glut of Mall Space Headed our Way

Be prepared to see a lot of “For Lease” signs. A glut of empty mall space is headed our way. Rising vacancies will pressure lease rates even though overly optimistic lease rates contributed largely to the boom. No one at any stage of the game ever bothered to figure out who was going to occupy all this space.

Mike “Mish” Shedlock
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