Corporate real estate is a cutthroat business

I remember back during the Great Financial Crisis, when there was lots of writing and talk about the moral obligation to pay your mortgage ("Faced with an underwater mortgage: the moral choice to pay," Christian Science Monitor), about the contradiction of big firms like Related Companies "walking away" from loans, by "giving the keys to the property back to the loan holder" ("Commercial Property Owners Choose to Default," Wall Street Journal).

From the WSJ article:

Companies such as Macerich Co., Vornado Realty Trust and Simon Property Group Inc. have recently stopped making mortgage payments to put pressure on lenders to restructure debts. In many cases they have walked away, sending keys to properties whose values had fallen far below the mortgage amounts, a process known as "jingle mail." These companies all have piles of cash to make the payments. They are simply opting to default because they believe it makes good business sense.

From the CSM article:

Call it what you will – a “strategic default” or simply cutting one’s losses in a business decision – this trend to walk away is creating an erosion of trustworthiness, and not just for the financial industry. It is a creeping moral crisis that needs a solution soon.

Yes, under certain circumstances and in those states where lenders have limited rights to go after a walk-away’s assets, a default can make sense – in an amoral calculation of personal finances. A buyer took a risk by assuming a rise in home prices and failed, similar to a failed business or a speculator in commodities.

Yet if more Americans get used to being deadbeats in a heartbeat, it will lead to higher interest rates and create other hurdles for those want to buy a residence and honor their contract. It would also create more uncertainty for still-wobbly banks and put a drag on the economic recovery, helping keep unemployment high.

While a program to modify home mortgages was developed, most of the banks didn't handle it very well, many people didn't get modifications, and millions of houses went into foreclosure. 

And speaking of taking advantage of new investment opportunities, a number of capital investment firms bought single family houses in bulk from banks, and now rent them out, changing the nature of residential housing market more generally.

A lot of the anger that has affected politics since 2008 was the idea that regular people weren't helped very much during this time, that most of the government "help" went to corporations, and the officers of these corporations faced no consequences.

There's an article in Bloomberg about what's going on in the commercial property market now, with big firms walking away from some mortgages and properties, while still raising funds for new endeavors.   In these cases, "it's just business," proving that residential mortgage owners are treated much differently from big capital.

From "Real estate investors skip paying loans while raising billions":

Some of the largest real estate investors are walking away from debt on bad property deals, even as they raise billions of dollars for new opportunities borne of the pandemic.

The willingness of Brookfield Property Partners LP, Starwood Capital Group, Colony Capital Inc. and Blackstone Group Inc. to skip payments on commercial mortgage-backed securities backed by hotels and malls illustrates how the economic fallout from the coronavirus has devalued some real estate while also creating new targets for these cash-loaded investors.

"Just because a prior investment didn't work out doesn't necessarily mean that should tarnish the reputation for future endeavors," said Alan Todd, head of U.S. CMBS research for Bank of America Securities. "It's not like something was done in bad faith."

While cutting losers to buy winners is an age-old investment proposition, the Covid-19 pandemic may create even more openings than the past crises that became bonanzas for real estate investors. ...

Missing payments on CMBS debt is relatively painless, because it's typically non-recourse, meaning borrowers can hand over the keys to a property and lenders won't be able to come after other assets. Property owners are more likely to walk away when their equity has been wiped out by lower values. ...

Now these firms are raising money for their next round of bets, even as they skip debt payments on old obligations.

At least 11 Brookfield malls with more than $2 billion in CMBS debt are delinquent or seeking payment relief because of COVID-19. The company has already repurchased some of its former debt at reduced prices.

"The lenders are willing to sell us their loans or the mortgages back at a discount," Brookfield Property Chief Executive Officer Brian Kingston said during an Aug. 6 earnings call. "And so in that case we've been able to essentially reacquire the asset at an attractive basis."

Brookfield Asset Management Inc., the parent of the property firm, raised $23 billion from investors in the most recent quarter, including $12 billion in new commitments for a distressed fund.

The article discusses similar moves by other real estate companies including Colony Capital, Starwood Investment Trust, and Blackstone.

Conclusion.  I'm not saying that people shouldn't worry about paying mortgages and treat it as an important obligation.  I'm just pointing out the double standard.  I suppose someone will point out the difference between recourse and non-recourse loans.  In recourse loans, the lender has call on other assets owned by the mortgagee.

But given the impact of the coronavirus on the retail, hospitality, and entertainment industries, there's going to be a property bloodbath, and many communities will be harmed by it, just as they were in the real estate fallout from the Savings and Loan Crisis in the 1980s and 1990s and other times of overbuilding followed by crashes.