The commercial Dungeness crab season has been cut short for most of California for a fifth successive year in an effort to reduce potentially fatal whale entanglements in fishing gear.

State Fish and Wildlife Director Chuck Bonham announced Thursday that all crab pots and vertical lines must be removed from the ocean south of Point Arena by April 15 — 2½ months before the commercial season’s traditional June 30 close. The season also started six weeks late, with crews allowed to put only 50% of their gear in the water at first.

Though not entirely a surprise, the early finish comes as a significant blow to a struggling fleet that has yet to make up for the repeated loss of its lucrative Thanksgiving and Christmas markets in the beginning of the season.

And with the salmon season canceled this year because of a collapse in king salmon stocks, the inability of commercial crews to harvest crab for a longer period this spring may mean some fishermen and women decide to pack it in.

“It’s a business,” said veteran Bodega Bay fisherman Tal Roseberry. “Most people get into it because they love it. But if it doesn’t operate in the black, and you’re not able to feed your family, put a roof over your head, you have to start looking at something else. Loving it doesn’t pay the bills.”

This year’s early close also comes as state, federal and nongovernmental conservation agencies are putting increased funding and support behind whale-safe “ropeless” or “pop-up” gear in development over recent years to allow for crabbers to extend their efforts during the shoulder seasons, even when the giant marine mammals are present.

Instead of fixed gear, with a crab trap on the ocean floor connected to a floating buoy by a long vertical line, the experimental style keeps all the gear together on the sea floor until it’s triggered by a timer, acoustic signal or some other mechanism, releasing the buoy that then rises to the top.

Many commercial crabbers have been dismissive of the idea, convinced it can’t meet their needs and concerned that costs for the new equipment will put it out of reach. They say failure rates are high, and the fact that surface buoys don’t mark their location is an invitation for different crews to get their crab pots piled up.

The next thing you know, “we’ve created a whale gill net,” said veteran Bodega Bay fisherman Tony Anello.

There’s been some reluctance on the part of commercial captains to apply for the state permits required to experiment, even though it would allow them to continue catching crab into June.

“The ropeless gear is a non-starter, as far as we’re concerned,” said Crescent City crabber Ben Platt, president of the California Coast Crab Association, which represents about 140 commercial Dungeness crab permit holders in California, including about two dozen in Bodega Bay.

“We’re trying to keep ourselves alive, and we want to spare the wildlife, too,” said Dick Ogg, vice president of the Bodega Bay Fisherman’s Marketing Association. “There’s a lot of tension around pop-up gear.”

Members of the state Department of Fish and Wildlife and conservation groups are bullish about the new traps, however, with several manufacturers working on or ready to test equipment.

Ryan Bartling, a senior environmental scientist with the state, said it may that only a segment of the fleet decides to use it in the end, but it would allow for crabbing during more of the traditional Nov. 15 to June 30 season.

“I think it’s within reach,” he said. “What the timeline looks like, I’m a little uncertain. But the technology is there. It’s just making it all work together.”

Geoff Shester, senior scientist and California campaign director for Oceana, said he has worked with crabbers who have tried some types of gear during its development and seen it function well in the ocean, but says they need to test it, find the strengths and weaknesses so they can be addressed.

“It’s not going to happen overnight,” he said. “It’s going to take some trial and error.”

He said the whole effort is intended to allow crabbers to spend more time on the ocean without harming wildlife or violating rules, but it only works if the fleet participates.

“We’re trying to do this in a way that’s really going to work,” Shester said. “We want them to stay employed.”

Dungeness crab and chinook salmon have long been the mainstays of the North Coast’s fisheries, even as salmon populations declined over recent decades along with their freshwater spawning habitat.

But the region’s crab fishery has been in tumult for most of the past decade, first because of a protracted marine heat wave that spurred a toxic algae bloom, delaying the 2015-16 season start by more than four months.

Donald Trump may be the first former U.S. president to be indicted in a criminal case, but he’s far from the first big real estate player to get caught up with law enforcement authorities.

Trump was indicted Thursday for allegedly falsifying business records to cover up a hush-money payment to porn star Stormy Daniels.

A number of other prominent real estate developers have faced charges including bank fraud, tax evasion and witness tampering — and more than one received pardons from the former president who built his fame in their industry, while yet another received a pardon from Trump’s predecessor in the White House, Barack Obama.

Here’s a closer look at who they are, and what happened, in the cases involving well-known real estate players in the nation’s biggest cities.

Charles Kushner

In 2004, multifamily developer and landlord Charles Kushner pleaded guilty to 18 counts, including making illegal campaign contributions, falsifying tax returns and witness tampering. He was sentenced to two years in prison and served 14 months, getting released in 2006.

In 2020, Kushner, whose son Jared is Trump’s son-in-law, received a presidential pardon from Trump.

Ian Schrager

Boutique hotel pioneer Ian Schrager was convicted of tax evasion in 1980. The property at issue was Studio 54, the famed Midtown nightclub he co-founded. He served 20 months in prison.

Schrager received a pardon from a different source — President Obama — in the final days of his term in 2017.

Alex Adjmi

Though family ties put Kushner in Trump’s orbit, he’s not the only real estate player the former president pardoned.

In 1996, a federal sting operation convicted Manhattan retail titan Alex Adjmi of laundering $22.5 million for a Colombian drug cartel through a Connecticut brokerage that turned out to be an undercover operation by the FBI and the Drug Enforcement Agency.

The head of A&H Acquisitions served nearly four years in prison. Released in 2000, Adjmi received a pardon from Trump in 2021.

Michael Shvo

While juggling several prominent development projects, New York real estate broker-turned-developer Michael Shvo was hit with charges in 2016 for allegedly scheming to evade payment of more than $1.4 million in taxes related to the purchase of fine art, furniture, jewelry and a Ferrari.

Shvo pleaded guilty to the criminal tax fraud charges and settled the case for $3.5 million, avoiding any time behind bars, after a 19-month saga that sidelined him from a number of notable projects.

Larry Freed

Chicago real estate developer Larry Freed went from serving as head of one of the largest privately owned shopping center development firms to serving more than two years in federal prison on fraud charges. 

His firm, Joseph Freed and Associates, had obtained a $105 million line of credit for city and suburban developments based on collateral previously pledged to another bank, prosecutors said in 2016. Freed’s three-year sentence was reduced to probation in 2020.

James Batmasian

One of the largest private real estate owners in Boca Raton, Investments Limited founder James Batmasian pleaded guilty in 2008 to evading $250,000 in payroll taxes. He served an eight-month prison sentence.

Batmasian also received a presidential pardon from Trump in 2020. 

José Huizar

Former L.A. city councilman José Huizar pleaded guilty in January to operating a pay-to-play scheme to give special treatment to developers who funded and facilitated bribes and other unlawful financial benefits.

The politician’s seat on the Planning and Land Use Management Committee gave him purview over major commercial and residential developments. His plea came after two developers, David Lee’s 940 Hill and Chinese real estate firm Shen Zhen New World I LLC, were found guilty of bribing Huizar for help.

Huizar faces a sentence of up to 26 years in prison, though federal prosecutors recommended he be sentenced to no more than 13.

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It’s been almost three weeks since Silicon Valley Bank (SVB) blew up. With both NY Signature Bank (SBNY) and Credit Suisse (CS) following right behind it.

Now, I recently touched on SVB and the chronic issues plaguing U.S. banks.

But there’s one issue that’s really worrying. . .

And that’s the ticking time bomb in the commercial real estate market – which is especially dangerous for smaller banks.

Why?

Because smaller banks – such as local and community banks – are sitting on a pile of toxic commercial real estate loans.

And I expect things are nearing a tipping point. . .

Let me explain.

Commercial Real Estate: Things Are Growing Very, Very Fragile

So, what is commercial real estate?

Putting it simply, commercial real estate (CRE) refers to properties used for business or investment purposes, rather than for personal residential use. Meaning office buildings, retail spaces, industrial properties, warehouses, multi-family (apartments), and other types of commercial properties.

Commercial real estate is typically purchased, leased, or developed with the purpose of generating income through rent or resale. Investors and businesses may also use commercial real estate for their own operations, such as leasing office space for employees or storing inventory in a warehouse, etc.

In other words, commercial real estate is essentially used for work-related business and thus drives income from such activities.

And this is a huge market.

For instance, the commercial real estate market is worth around $20 trillion.

And after decades of surging growth fueled by low-interest rates and easy credit, commercial real estate is now hitting a brick wall.

And I believe there are three main reasons for this commercial real estate stress:

I. Higher interest rates – which tend to decrease marginal demand for expansion by businesses (less space required), eat into landlord earnings, weigh down asset prices, and also increase the cost of debt.

This is a big problem for commercial real estate as it’s a highly leveraged sector (aka debt-dependent).

It’s estimated – according to the Kobeissi Letter – that over the next five years, more than $2.5 trillion in commercial real estate debt will mature.

Keep in mind this is far more than in any other five-year period in history.

Thus rolling over such a massive amount of debt has become much more expensive at a time when prices keep falling. And defaults are already beginning – such as Brookfield Asset Management and PIMCO failing to recently refinance.

 II. Office space vacancies mount as businesses struggle to get workers to come back into the office.

For context, over 25% of U.S. employees still work remotely (up from 5.7% in 2018). And U.S. metro office space vacancies just hit 18.7% – which marks an all-time high.

This matters because if more individuals work from home, companies don’t need excess office space. So they’re canceling leases, or simply selling marginal properties.

And we’ve seen this over the last year as companies – from Meta and Intel to Chevron and Wells Fargo – downsize in big ways.

Breaking leases and selling commercial real estate will further eat away at rent margins and sink property prices (as supply overwhelms demand).

III. There was a glut of commercial real estate built over the last few years. And there’s still a ton coming online.

For perspective – as of February 2023 – there’s about 125 million square feet (M-sqft) of office space under construction. And another 271.3 M-sqft in the planning stages.

Making matters worse – according to CoStart – there’s currently 232 M-sqft of surplus commercial real estate up for subleasing. Which is twice the level from before 2020.

Now, I expect much of that planned construction won’t continue. But what’s already being built is a huge amount.

Thus – as I’ve written about before regarding the capital cycle – these builders are adding supply into a glut (typical in the late stage of the cycle).

This will weigh down building prices and rents further as the supply increases at a time when demand is already anemic.

So, it’s not hard to see that the commercial real estate market is growing increasingly fragile from both structural issues (debt and work-from-home) and cyclical downside (higher interest rates and overbuilding).

But the big question is, who’s most at risk of further downside?

Commercial Real Estate and Smaller Banks – An Unbalanced and Fragile Dance

I think it’s clear that the downside in commercial real estate outweighs any upside in the years ahead.

And while many focus on this aspect, I’d rather look at what negative ripple effects this will cause.

Hence why I’m looking at smaller banks. . .

Now, what do I mean by smaller banks?

The U.S. government describes small banks (or rather community banks) as having assets of less than $1.384 billion in either of the last two calendar years.

So – according to recent data – that’s about 3,725 banks in the U.S. (out of the roughly 4,200 total commercial banks)

And while these ‘community’ banks hold less than about 10% of total assets in the banking system (give or take) – they’re the lifeblood in smaller and rural markets.

So, what’s the issue here?

Well, these community banks are extremely exposed to the commercial real estate market.

To put this into context – according to Morgan Stanley – U.S. banks currently hold roughly 38% of all commercial real estate debt.

Meaning banks hold $1.8 trillion of the total $4.5 trillion debt.

And out of that, nearly 30% is held by small banks (compared to just 7% for large banks).

More worrisome is that the acceleration in commercial real estate loans by small banks has soared over the last decade. Rising from roughly $800 billion in 2012 to $2 trillion in mid-2022.

But most troubling is the sharp rise in the last two years. . .

And according to MSCI Real Assets, landlords received about 27% of financing from local and regional banks in 2022 – which was the biggest source of newly originated debt.

Other data – according to Goldman Sachs via FT – shows banks with less than $250 billion in assets make up about 80% of commercial real estate loans.

Thus it’s no stretch to say that the smaller banks are disproportionately leveraged in the commercial real estate market.

But here’s where the amplifying feedback loop comes in. . .

Since commercial real estate depends on a hefty amount of financing from smaller banks, these smaller banks also depend on commercial real estate prices and incomes.

When income streams from leases and property values rise, banks will make loans (as it’s profitable and secured by increasing property prices).

But when property prices (which back the loan) fall, and incomes erode (increasing default risk) – things sour.

Banks won’t extend new loans into the sector. And without new financing, these commercial real estate owners can’t roll over their debt. So they’ll sell, pushing down prices further as supply increases relative to anemic demand.

Thus reinforcing the feedback loop as banks suffer losses and tighten credit further. And on and on.

So, why does this matter now?

Because since early-2022, banks have started tightening credit standards in big ways. Especially in the commercial real estate market.

For instance – over the last year – the net percentage of domestic banks tightening credit standards for commercial real estate loans has soared to 70% in Q1-2023.

This is problematic as a tidal wave of commercial real estate debt comes due in the next few years – with $900 billion maturing by 2025.

And these owners need access to credit.

Without it, they’ll end up forced to default and liquidate.

This will also affect smaller bank balance sheets in a big way. Since they’re extremely entrenched in the commercial real estate sector.

For instance – after SVB collapsed in early March – it put a bright light on the massive losses facing loan books for commercial real estate debt.

When regulators sold off $72 billion from SVB, it went for a $16.4 billion discount from what they were “valued” at on their books.

That means they went for roughly 77 cents on the dollar (or a 23% discount).

Now, it’s important to say that not all of the assets sold off from SVB were commercial real estate related. Roughly just $3 billion of their $13 billion real estate loans were commercial real estate.

But this gives us a look at the potential issue banks are facing with unrealized losses (meaning the prices they’ll get if sold on the market).

Or – putting it another way – smaller banks are going to have to deal with some serious write-downs (i.e. the difference between what they think their worth vs. what the market will pay)

For perspective, Barclays expects office-building valuations to drop by 30% over the next few years.

This will put steep pressure on small-to-medium bank loan books – since they’ve extended most of the credit to this sector.

Making matters worse, small banks have seen deposits fly out the door after the SVB blowup.

Smaller banks saw deposits drop by a record amount – down $109 billion through March 15th. And over $200 billion by the 27th.

This marks a 1.5% year-over-year decline – which is the first annual drop since 1986.

And if these smaller banks suffer further deposit outflows, they may have to sell assets in a hurry (and at a discount).

 

It’s important to remember that banks are black boxes – aka something with internals that are usually hidden or mysterious to onlookers.

Even the best analysts don’t really know what bank loan books are truly worth.

But one thing seems clear, the commercial real estate sector is growing more and more fragile.

And with it, so are the smaller banks that extended credit to them.

The black swans are lurking.

Related

A federal judge sided with commercial landlords Friday, ruling that a Covid-era protection for retail tenants is unconstitutional.

For owners whose tenants fell behind on rent during the pandemic, the decision offers a chance to recoup some of that lost money.

At issue was a city law passed two months into the pandemic that barred landlords from going after tenants’ personal assets to recover unpaid rent.

Elias Bochner, landlord to a Chelsea burger joint that went under during Covid, and other commercial property owners sued the city over the rule in 2020. He claimed it violated the U.S. Constitution’s Contract Clause, which bars governments from making laws that interfere with private contracts.

The city initially won a motion to dismiss that suit. Judge Ronnie Abrams ruled that case law gave “substantial deference” to policymakers working in the public interest, as was the case during the pandemic.

Landlords appealed and won a favorable ruling in October 2021. The court identified several “serious concerns” that the guaranty law was not a reasonable means to uphold public interest, as required by the Contract Clause, and sent the case back to Judge Abrams.

On the last day of March, Abrams ruled that the city did not produce enough evidence to show the guaranty law “is reasonably tailored to accomplish its legitimate policy goals.”

Different landlords filed a state lawsuit to challenge the city law, which was sponsored by City Council member Carlina Rivera of Manhattan, but lost on appeal.

For commercial landlords whose tenants fell behind on rent from March 2020 to June 2021 and whose leases held them personally liable for that debt, the ruling is a huge win. Those landlords may now be able to go after those tenants’ assets, said Sherwin Belkin of the law firm Belkin Burden Goldman.

The Real Estate Board of New York celebrated the decision as precedent-setting for commercial real estate.

“We applaud the Court’s thoughtful and meticulous review of the record and believe this litigation will have important precedential value,” said the group’s general counsel, Carl Hum.

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On March 28, the CFPB issued a determination that state disclosure laws covering lending to businesses in California, New York, Utah, and Virginia are not preempted by TILA. The preemption determination confirms a preliminary determination issued by the Bureau in December, in which the agency concluded that the states’ statutes regulate commercial financing transactions and not consumer-purpose transactions (covered by InfoBytes here). The Bureau explained that a number of states have recently enacted laws requiring improved disclosure of information contained in commercial financing transactions, including loans to small businesses. A written request was sent to the Bureau requesting a preemption determination involving certain disclosure provisions in TILA. While Congress expressly granted the Bureau authority to evaluate whether any inconsistencies exist between certain TILA provisions and state laws and to make a preemption determination, the statute’s implementing regulations require the agency to request public comments before making a final determination. In making its preliminary determination last December, the Bureau concluded that the state and federal laws do not appear “contradictory” for preemption purposes, and that “differences between the New York and Federal disclosure requirements do not frustrate these purposes because lenders are not required to provide the New York disclosures to consumers seeking consumer credit.”

After considering public comments following the preliminary determination, the Bureau again concluded that “[s]tates have broad authority to establish their own protections for their residents, both within and outside the scope of [TILA].” In affirming that the states’ commercial financing disclosure laws do not conflict with TILA, the Bureau emphasized that “commercial financing transactions to businesses—and any disclosures associated with such transactions—are beyond the scope of TILA’s statutory purposes, which concern consumer credit.”

UPDATED, March 31, 5:45 p.m.

Crescent Real Estate is planting a flag in South Florida, acquiring the Colonnade Hotel in Coral Gables for $63 million.

The Dallas-based real estate development and investment firm is the buyer of the property at 180 Aragon Avenue, according to three sources familiar with the transaction, including Crescent’s partner in the deal. The hotel operates under Marriott’s Autograph Collection brand.

Crescent paid roughly $401,000 per room. Its joint venture partner, Houston-based private equity firm Sage Street Equity Partners, confirmed the transaction on its website. 

The seller, publicly-traded Pebblebrook Hotel Trust, disclosed the deal — without identifying the buyer — in a recent filing with the Securities and Exchange Commission.

Christopher Exler and Pamela Vasquez of JLL represented Pebblebrook.

Executives for Crescent, led by chairman John Goff, and Pebblebrook’s CFO Raymond Martz did not respond to requests for comment. 

In 2014, Pebblebrook paid $43.1 million for the 157-room building when it operated as a Westin-branded hotel. Two years later, Pebblebrook spent $18 million renovating the Colonnade. In 2019, the property switched to the Autograph Collection banner.

Last year, the Colonnade had a net operating income of $4.1 million, and hotel earnings before interest, taxes and other deductions of $4.8 million, the SEC filing states.

Completed in 1926, the Colonnade was designed in the Beaux Arts style by architect Phineas Paist. The building was originally developed as a sales center for Coral Gables founder George Merrick’s development projects. In 1989, the property was converted into a hotel after going through several other uses between the 1930s and 1980s. 

Pebblebrook, a Maryland-based real estate investment trust led by CEO John Bortz, owns 49 resorts and hotels with about 12,500 rooms in 14 markets, including Florida. 

Crescent owns roughly $4.5 billion in offices, multifamily, hospitality and senior living properties, according to the firm’s website. Crescent is also developing projects worth a combined $500 million. The Colonnade is the firm’s second Florida property. It owns the Westshore Grand Hotel in Tampa. 

In December, Crescent sold a Dallas office high-rise for $400 million. Also last year, the firm raised $265 million from private investors to be used as equity for new projects. 

Other recent South Florida hotel deals include the $17 million acquisition of a Coral Springs Marriott-branded hotel by Michigan-based hoteliers Malik Abdulnoor and Sahir Malki Abdulnoor.

Last month, New York-based firms Blue Suede Hospitality and MCR paid $40 million for two South Beach hotels, and $118.3 million for a Miami Hilton-branded hotel, respectively.