Broadway Partners Honored With "Mini-Macklowe" Award

Broadway Partners, a New York real estate investor, is coming dangerously close to emulating its apparent hero Harry Macklowe, the New York real estate developer who defaulted on his debt obligations earlier this year. According to the Wall Street Journal's Property Report, (which requires a subscription so I cannot link) Broadway Partners, an extremely aggressive office property investor, is currently peering down from the top of the commercial real estate ponzi scheme and realizing that it may be the greatest fool. Apparently, Broadway acquired billions of dollars worth of office properties using short-term debt near the peak of the credit cycle and is now desperately trying to avoid handing over the keys to the trophy properties it has acquired over the years. The investment partnership will try to raise equity from its investors to buy back debt at a discount from the debt-holders. Furthermore, it is attempting to offload several properties in Houston and San Francisco in order to raise cash. Will Broadway be able to pull all of this off before the first portion of the short-term debt comes due in January 2009? That depends on how much the credit environment improves in the next six to nine months.
When I read stories like these in the press (please see my previous post about Frank Lembi for another example of a real estate titan who is punting properties after a debt-fueled buying spree), I start to wonder what all of these supposedly experienced and brilliant real estate investors were thinking when they paid sub-3% cap rates to buy investment properties. I understand that some markets are better than others. It is certainly the case that you should see 10% cap rates in a crummy market like Detroit that has horrible fundamentals and significantly lower cap rates in markets with strong fundamentals like San Francisco or New York. But why would anyone ever pay a cap rate that is less than the 10 year note for an illiquid asset? I was recently told by a real estate broker when comparing higher cash flows in a different city to properties in San Francisco that "San Francisco is not a cash flow market. It's an appreciation market." That has certainly been the case for the past few years and could continue indefinitely if investors weren't buying properties with enormous amounts of leverage, particularly short-term debt. This is how San Francisco became a "Negative Cash Flow Indefinitely, GET ME A BID FOR THIS BUILDING!" market.
While I'm busy honoring Broadway Partners for its real estate folly, I might as well hand out another award. This one goes to Sam Zell. I'll call this award: "I sold the high! Ha ha, suckers!" Sam Zell, for those who don't know, sold his REIT Equity Office Properties for $36 billion in early 2007 right before the credit markets took a dive. That's some good timing!