Wednesday, July 8, 2009

East Coast Vs. West Coast Commercial Real Estate Blowouts

The WSJ reports that Deutsche Bank has finally found a buyer willing to shell out $600 million for the Worldwide Plaza in Manhattan. Duetsche, for those who are fuzzy on the details, was one of the bankers who thought it was a great idea to lend to Harry Macklowe back in early 2007 so he could pay the all-time record high in commercial real estate prices. Mr. Macklowe was the first high profile developer to default on his loans and start handing over the keys to his lenders during this real estate bust, although he certainly has plenty of experience doing it in the last real estate bust of the early 90's. Maybe the next time around, bankers will think twice before lending to him? But really, who am I kidding? Next time around, we'll have a whole new set of fresh-faced bankers throwing money at anyone with a pulse and a grand idea for why this time, things really are different and fundamentals don't matter.

The Worldwide Plaza is a lovely building on the fringes of better neighborhoods, but it obviously wasn't worth the $1.75 billion that Mr. Macklowe shelled out for it. The new owner, George Comfort & Sons., should do much better on his investment than Mr. Macklowe given that he paid 65% less, but he still has some work to do. The building is 50% vacant, which is nothing that a good slashing in asking rents can't remedy, much to other midtown Manhattan's office property owners' chagrins. But I'm fairly certain that this is how markets work. Prices adjust until we reach equilibrium. Unfortunately, an equilibrium price that reflects a 65% drop in Manhattan office property values should everyone involved in a deal during the boom years browning themselves.

Meanwhile, over on the West Coast, New York developer Millenium Partners, owner of the Four Seasons, didn't make payments in May and June on the hotel's $90 million securitized mortgage in a bid to compel the loan's special servicer to rework its terms. The developer claims that withholding the debt was a strategic decision, but I'm guessing it had something to do with the property not generating enough money to meet the debt service. You see, Millenium wants to restructure its debt and it's hoping to get conversations started. Funny thing is, when you or I "strategically withhold payments on our mortgages", the bank takes the damn house away. I guess that's not the way it works when you are a hoity toity NYC developer. We'll see how the lenders feel about this one.

In May, Barclay's put the Stanford Court Hotel into receivership because of a default on the hotel's $90 million mortgage. I'm fairly certain there was nothing "strategic" about that default. The WSJ journal points out that hotels aren't generating enough cash to make interest payments on their mortgages, which has caused the delinquency rate on securities with hotels pledged as collateral to jump to 4.3% in June up from 0.5% in a year earlier (data from Trepp LLC.)

The Four Seasons and the Marriott (owner of the Stanford) can blame their lack of cash flow on AIG of course, and that stupid junket that the company refused to cancel, which has put the kibosh on most luxury business travel. 2008 was the death of the boondoggle as we knew it. Oh, and also the depressed economy, which AIG is sort of also responsible for. In any event, the slow motion train wreck that is the commercial real estate market is playing out all over the country and is likely to pick up steam as a wave of defaults lead to foreclosures and bank liquidations. I happen to think this will be equivalent and possibly worse than the subprime problem. But then again, subprime was "contained" so we have nothing to worry about.

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