Souring Stuyvesant Property Investment Portends More CMBS Pain Ahead

Back in late 2006, when commercial property investors liked to swing it around, Tishman Speyer, in cahoots with Blackrock and Calpers, paid $5.4 billion for a huge block of apartment buildings in Manhattan.  Known as Peter Cooper Village and Stuyvesant Town, the complex of 11,200 apartments was originally built for veterans returning from World War II.  It was rumored to have turned into a great place to take advantage of rent-stabilization in Manhattan if your grandparents happened to keep their apartment after moving on to a nicer house.  Tishman Speyer's plan was to force out those who were illegally paying below-market rents, renovate, refurbish and rent out the properties at much higher prices.  Metlife, who sold the properties in 2006 was probably just looking to lighten its real estate load in what it perceived as an inflated Manhattan property market.  The insurer dumped its own monikered Metlife Building in 2005, also to the overeager Tishman Speyer.  When the Stuyvesant deal was originally announced, many commercial real estate investors marveled at the price, which implied a 2.5% cap rate (i.e. crazy).  I speculate that the shrewd negotiations between Tishman and Metlife may have gone like this:

Metlife: We have another property to show you.  How do you feel about Stuyvesant Town?

Tishman:  Love it!  How about $4.5 billion?

Metlife:  Seriously???

Tishman: Ok.  We'll pay $5 billion.

Metlife:  Now stop that!

Tishman:  $5.4 billion, but that's our final offer.

Metlife: Ok!  Ok!  You're done.  Just stop raising your bid for the love of God!

The Wall Street Journal reports today that the apartment complex is running behind its financial plan and will run out of money to pay its $3 billion mortgage in six months, according to a report released by Fitch Ratings.  As of January 15th, the project's interest reserve was $127.7 million down from $400 million when the property was purchased.  A separate general reserve fund used to renovate apartments is "completely depleted."  The private company has said in the past that it expected to fund more capital as needed.  But Tishman declined to comment.  Admittedly, it seems hard to imagine that Tishman, Blackrock, and Calpers would choose to allow the partnership to default and let the lenders seize the buildings.  But times are tight so it is a risk.  Injecting further money into this venture would be politically difficult for Calpers in particular, as its investment fund is suffering from major losses and it faces the near certainty of having to hike rates for California public employees.  Imagine having to pay more into your retirement fund because the boobs managing the money happened to invest in a bunch of illiquid land deals, soured private equity funds, and a HUGE apartment building in Manhattan? 

In any event, the situation is coming to a head within the next few months.  For the market's sake, I certainly hope that we're not looking at a foreclosure auction of 11,200 Manhattan apartments.  Frankly, I'm not sure who on earth would be interested in bidding on this beast of a property and where they would find financing in this market.  Maybe give Ben Bernanke a call?