Calpers has given up control of its stake in a trophy office tower in Portland, Ore. The Koin Center, nicknamed the "mechanical pencil" for its signature shape, was purchased for $109 million in 2007 by a partnership that included Calpers and CommonWealth Partners, a real-estate investment company based in LA. The partnership has defaulted on the $70 million debt, and New York Life, the lender, has appointed a receiver to control and possibly sell the property. The article has a great quote from a senior vice president of corporate services for Colliers in Portland "Calpers is the gold standard, and its surprising that their backup plan is to walk away." I wonder why that is so surprising since it appears to be Calpers' least expensive option. That's sort of the whole point of an option. I might have paid $1 for the Microsoft $50 calls, but since the stock is only trading a $23, I'd be an idiot to exercise them. The building's office vacancy rate is set to rise from about 7.9% in the second quarter to the 26% range by about October. I'm sure that California retirees are cheering Calpers decision to walk away from this turkey.
Stockbridge Real Estate Funds is considering a takeover bid for the management of a $2.6 billion fund run by Deutsche Bank's real estate investment unit. Apparently, this is a rare move in the real estate world. In this instance, however, some of Stockbridge's top executives are intimately familiar with the 92 investments in the fund because they used to work there and manage the fund. The former managers of the Deutsche fund bolted in 2007 when their five-year retention pay plans ended and were hired by Stockbridge. They did such a great job managing the fund at Deutsche that the fund has warned investors that it may seek bankruptcy protection. Safe from their new perch at Stockbridge, the former managers would like to buy back the crap that they left behind at Deutsche. Isn't it fun doing this with other people's money? As long as you get a nice retention package to pay you for all your talent, who really cares about the consequences when you saddle your former investors with a bunch of really crappy real estate investments?
Meanwhile, the "Technically Speaking" section of the WSJ has a ridiculously bullish piece on REITs. It explains why REIT stocks are going to continue to rise despite the many, many problems in the commercial property market. The article gives such solid evidence as "Because the sector's heavy debt load was such a big contributor to its precipitous drop last fall, REIT stocks are expected to go nowhere but up if debt refinancings occur." Also "Given the appearance that the banking system has stabilized, that leads you to the belief that most of these REITs will be able to get their refinancing in order." And my favorite "From a technical view, REITs look set to rise as much as 35% from current levels." I don't know about you, but I'm convinced. Forget everything I said in the past two posts about commercial property values plummeting, "gold standard" investors walking away from their investments and saddling lenders with half empty buildings, defaults, declining cash flows and covenant violations. I'd better go load up on some REIT stocks!
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