Lauth Group leads slide in commercial real estate

The outlook for commercial real estate development continued to worsen in 2009, as one major name faltered and other companies
scrambled to redesign their business models and capitalize on the carnage.

Each of the city’s major development
firms shed employees as demand and financing for speculative projects disappeared. Simon Property Group Inc. CEO David Simon
went so far as to say, in a conference call with Wall Street analysts, that new retail developments are “dead for a
decade.”

The most prominent local victim of the downturn was Lauth Group Inc., the once-mighty developer
of more than $3 billion in projects. The company filed several subsidiaries for Chapter 11 bankruptcy protection in May. Company
officials blamed the impatience of a major lender, Chicago-based Inland American Real Estate Trust, for the filing.

But the company, which grew rapidly to keep pace with an insatiable demand for new office, industrial and retail developments,
simply could not go on once the projects dried up. Lauth started 2008 with about 450 employees but had fewer than 50 late
in 2009, as the company’s principals sought to renegotiate with lenders and emerge from bankruptcy protection as a mostly
property-management-oriented company.

Few commercial property owners had any equity left in their buildings, let
alone enough to meet the higher thresholds banks were demanding. And funding from commercial mortgage-backed securities—a
$1 trillion funding source just three years ago—had disappeared entirely. With so many commercial properties under water,
real estate players in 2009 began positioning themselves to take advantage of what they saw as an inevitable shakeout.

Those seemingly best positioned to take advantage of the downturn included real estate investment trusts such as Simon
that had access to public capital. Simon in December agreed to acquire Prime Outlets in a $2.3 billion deal and was setting
itself up for a possible bid for its largest U.S. competitor, Chicago-based General Growth Properties.

Meanwhile,
smaller local development firms had to find other ways to bring in revenue as they waited out the market. Condo and retail
developer Kosene & Kosene, for one, opened a residential brokerage operation.•