....have we been able to see any 'price discovery' yet? Some say this is just another problem that has kind of been silently shelved in the hopes that it won't catch the headlines...

...but here is a bit of 'price discovery' and if it is any indication, banks probably aren't liking what they are seeing. Ouch. 2006 1.3 bil...sold @ auction for a whopping 660.6 mil. Were Broadway Partners the only ones buying way over-valued CRE during the recent
'vapor' boom? Doubt it.

GL

"Han**** Tower Sells at About Half Price to Normandy (Update2)
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By Hui-yong Yu and Peter S. Green

March 31 (Bloomberg) -- Boston’s John Han**** Tower, New England’s tallest skyscraper, was sold at auction to Normandy Real Estate Partners and Five Mile Capital Partners LLC for $661 million, about half of what it traded for just three years ago.

The companies agreed to pay $20.1 million for the mezzanine debt on the 60-story building and assume the mortgage of $640.5 million, according to a statement issued at the auction in New York.

“We will look forward to serving their tenants in keeping with the high standards for which Normandy is known,” Normandy and Five Mile said in a statement.

The price shows how far real estate values have fallen since their peak in 2007. The sale is a defeat for owner Broadway Partners and company founder Scott Lawlor. The firm paid $1.3 billion for the property in 2006 and defaulted on its loan. The building was the crown jewel in Broadway’s $3.3 billion purchase of 10 buildings from Boston-based Beacon Capital Partners LLC in December 2006.

Steve Solomon, a spokesman for Broadway Partners, had no immediate comment.

Normandy and Five Mile began buying pieces of the mezzanine loans at discounts in June 2008. Normandy owns more than 8.8 million square feet of commercial and industrial space in the northeast, including 4.5 million square feet in Boston, according to a company statement.

Normandy also won the auction for Broadway Partners’ 10 Universal City Plaza in Burbank, California. It bid on the property alone. The 35-story building in Los Angeles’s San Fernando Valley is located next to the Universal Studios Hollywood theme park.

Two Minute Auction

Five Mile Capital, founded in 2003, invests in asset-based loans, real estate, debt, structured finance and related assets. The Stamford, Connecticut-based firm, founded by Gary Holloway, Steven Baum, Thomas Kendall and Konrad Kruger, has more than $2.9 billion under management, according to its Web site.

The mezzanine lenders controlled the outcome because they were allowed to count the outstanding amount of their roughly $472 million loans as part of their bid, putting them ahead of potential rivals.

The bidding for the Han**** tower took less than two minutes in a 38th-floor conference room at the Times Square headquarters of law firm Skadden, Arps, Slate, Meagher & Flom LLP in Manhattan. The room, with sweeping views across the Hudson River, was less than half filled.

Auctioneer Richard Maltz opened the bidding in increments of $100,000. Bidders were asked to bid only the amount they would pay for control of the Broadway Partners limited liability corporation that held the mezzanine debt.

No Minimum Price

With no minimum price, SL Green Realty Corp., owner of the debt servicer, Green Loan Services LLC, started the bidding for control of the Han**** tower at $20 million. The Normandy group immediately raised a black printed plaque to bid $20.1 million.

“Twenty million, one hundred thousand dollars bid,” said the auctioneer. “Going once, going twice, fair warning. Last call. Sold for twenty million, one hundred thousand dollars.”

Occupancy and rents at the Han**** Tower, at 200 Clarendon St. in Boston’s Back Bay neighborhood, have fallen since Broadway bought the 1.76-million-square foot building, said Reis Inc. The building’s value has fallen to less than $750 million, said the New York-based real estate research firm.

Rents Falling

The Han**** Tower, at 200 Clarendon St. in Boston’s Back Bay neighborhood, is probably worth less than $750 million, according to Reis Inc., a New York-based real estate research firm. Occupancy and rents have fallen since Broadway bought the 1.76 million-square-foot building, said Reis.

After Broadway defaulted on mezzanine loans secured by stakes in properties in January, the mezzanine lenders hired Green Loan Services to oversee the workout. Green hired Eastdil Secured to conduct the auction in New York.

Normandy, based in Morristown, New Jersey, was founded in 2002 by Finn Wentworth and David Welsh, who worked together at Gale & Wentworth, a real estate investment and development firm.

The glass-faced Han**** Tower was designed in the 1970s by architects I.M. Pei and Henry Cobb. Broadway acquired $15 billion of office buildings since it was founded in 2000 by Lawlor, who serves as its chief executive officer.

When Broadway bought the Han**** Tower, debt financing was readily available and office landlords were increasing rents and filling all the available space. Mezzanine loans are intended to fill the gap between a first mortgage and the borrower’s equity.

To contact the reporters on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net; Peter S. Green in New York at psgreen@bloomberg.net.

Last Updated: March 31, 2009 12:39 EDT "

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I think Ben has a migraine.

I wanted to point out more on this topic because I think it will catch people off guard in several ways.

First, who invests in commercial real estate, well a lot of pension funds do (often indirectly through hedge funds). Pensions especially like things like malls.

I remember watching an investor in commercial real estate talking about the sector a while ago, the guy is truely clueless about what is likely to happen to him. Even though the market is crap he has 2 basic justifications. 1) he owns high end properties which don't decline in value even if the broader market does (I somehow doubt that will end up being true this time) and 2) he bought rental properties with rents below market rates (I believe I also saw GE give this justification as well). In other words, their plan is to jack rental rates in the recession to make up their profit and cash flow no matter what happens.

I think they're going to find that rental rates which they believe are under market value, by the time this is over, will look high. And the nature of large scale debt-deflation will drag down the value of high end commercial properties too.

On the topic of raising rents. There are a lot of unrealistic skyscraper / office tower owners out there methinks. I'm still seeing some major tenants walk away from their office tower spaces they've held for over a decade when their current leases are expiring because the owners are clueless and trying to charge ridiculous rents even when the building or area does not justify it. It smacks of stupidity and cluelessness on the part of office tower owners. They are going to end up with big gaps in some of these buildings, and unable to attract tenants out of pure greed and desperation. It wouldn't have happened if they'd not gone for the greedy hardline on rents and so on. None of these tenants want to leave that I've seen, they just view the property owners as asking unreasonable things and being impossible to negotiate with. It seems also true to me that in most cases the owners do not understand the region they bought the property in, have probably never visited the place in person, and cannot understand that their property is in a crappy area. Read: There is a reason the rents on that were "below market", it's because that region is a crime ridden virtual slum.

Unexpected situation #1 - these commercial property owners won't take status quo or rent cuts, their plan involves rent increases (up to what they erroneously believed was prevailing market rates when they bought it) and are unwilling to listen to what renters are telling them on the ground. They will end up bankrupt and without tenants before they take so much as a dollar off their rents and will not negotiate no matter how bleak their outlook gets. They are incapable of changing their view that their current rents are "below market". Never mind the fact that market is what someone is willing to pay you now, not what somebody paid someone else 2 years ago.

GGP - general growth properties. This is a major mall owner on the verge of bankruptcy. They are basically having big tenants fold, including the "anchor tenants" in some malls. That's important for a lot of reasons.

Apparently the way malls are set up, the smaller renters have clauses linked to the presence of anchor tenants, if there isn't one, they can walk away from their leases en masse. In other words, the loss of one or more anchor stores in a mall, can cause a chain reaction scenario where the mall could implode as every tenant can suddenly walk out and toss leases. This is somewhat likely because the whole point of a mall is traffic, which are brought there by the anchor tenants. Who wants to be a retailer in a half empty mall. Even if a couple tenants stay, it's likely the mall owner goes bust or the mall closes, or traffic nearly stops. This could mean the closure of even healthy store owners in malls.

Now think about this in terms of some huge big box retailer which is an anchor shop in hundreds of malls, going out of business. A single big anchor store going out of business has the potential to bring down not only itself, but chain reaction implode perhaps hundreds of malls.

Have you even seen anyone tear down a mall to build something else? Or does it just sit there empty as a blight on the area?

So unexpected result #2, possibility of chain reaction mall implosion leaving an economic dead zone.

Apparently in some smaller cities malls generate an absolutely huge amount of revenue for the city as a percentage of the budget. Could create a lot of budget issues (not to mention degradation of the quality of life) for many small towns.

Yeah, its absolutely amazing to see how rents are still increasing right alongside vacancy rates...what gives? Bankruptcy, I guess. What do all the building owners think they can do, collude forever? Hell, even a few big property owners couldn't collude in this environment. Vacancy rates are still on the incline and 'The John Han****' Tower' that sold today at auction in Boston @ a 50% discount to 2006 levels was in a city that has one of, if not the lowest vacancy rates in any major metropolitan areas in the country, at least at the end of last year they were, but they did have a 50 basis point increase in their rate in Q4 of 08.

Rents will have to come down...in a few markets (globally) some are at least softening as construction of new space continues to deteriorate. I've noticed rents have not really fallen in Canada either but the longer some of this increasing vacancy lingers on the market, I think it will be forced down. Nevertheless, absorption rates are sure to get worse as they tend to trail employment growth, or is this case, unemployment growth. The only area that seems to be currently holding ins vacancy rates below the top of its 'natural level' are in the office space which will get worse as the employment picture gets bleaker, imo.

I hadn't thought through the mall and retail space but the point about 'anchor' stores breaking lease having a potentially deadly spiral effect seems a valid one. Are you sure contracts for smaller stores have those 'outs' in their contracts? Makes sense, I'd want one.

And yes, General Growth is struggling big time, they own a couple prominent malls out where I'm at, Alderwood Mall and WestLake Center.

"William Ackman seeks seat on General Growth Properties' board
Activist investor William Ackman predicts bankruptcy filing for General Growth Properties"

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I think Ben has a migraine.

By the way, , just an FYI, I use Richard Ellis for help in research, you do have to register an email addy but I like some of the tools for data and market analysis.

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I think Ben has a migraine.

Seattle building owners' capitulation time?

"Seattle office-lease rates dropped 10-12 percent this quarter"

"By Eric Pryne

Seattle Times business reporter

After holding the line for months, owners of downtown Seattle office buildings are starting to accept lower rents as they compete for increasingly scarce tenants, commercial real-estate brokers say.

Asking rents for Class A space in the downtown area in the first quarter plummeted to an average $34.27 per square foot per year, down more than 11 percent from the fourth quarter of 2008, brokerage Cushman & Wakefield said in a report Tuesday.

The quarterly drop was the downtown market's largest since at least 1997, according to Cushman & Wakefield's records.

"That's what they're asking," said Matt Christian, a senior director in the firm's Seattle office. "The deals that are being made are lower than that."

Asking rents for downtown office space of all classes have dropped 10 to 12 percent since the end of the year, said David Gurry, a senior vice president in the Seattle office of brokerage Colliers International.

There's relatively little demand, he said, and landlords are starting to price their space accordingly.

Last year, even as the economy stalled, local companies downsized and office-vacancy rates rose, many landlords resisted reducing rents. Instead, they offered prospective tenants upfront concessions — higher tenant-improvement allowances or several months' free rent — in part to keep their buildings' resale values high.

What changed? Two things, Gurry and Christian said.

First, big tenants, led by what once was Washington Mutual, keep putting more space back on the market, increasing available supply. JPMorgan Chase, WaMu's new owner, has canceled leases on more than 750,000 square feet downtown and could make much of its 900,000-square-foot WaMu Center available as well.

Second, new buildings in Central Seattle containing more than 2.5 million square feet of office space are just months from completion, and little space is pre-leased.

"I think the institutional owners [of existing buildings] looked at those realities and said, 'We really need to make some deals,' " Christian said.

Gurry agreed. "They aren't giving the farm away," he said, "but landlords are really taking a close look at where vacancy rates are going to be at year-end."

The total office-vacancy rate in the downtown area in the first quarter was 12.6 percent, Cushman & Wakefield said, up from 11 percent in the previous quarter and 8.4 percent a year ago.

Colliers International said in its own report that the downtown vacancy rate rose from 6.97 percent to 8.93 percent year over year. Unlike Cushman & Wakefield, Colliers includes owner-occupied buildings in its calculations.

Gurry said the vacancy rate could rise to the midteens by the end of the year. Christian said it could hit 20 percent.

In downtown Bellevue, the overall vacancy rate in the first quarter was 12.1 percent, according to Cushman & Wakefield, up from 10.8 percent in the fourth quarter and 5.7 percent a year ago. But rents held up better than Seattle's, declining just 2 percent during the quarter to $38.83.

Average asking rents in downtown Seattle actually were slightly lower than those on the suburban Eastside, including the I-90 and 520 corridors, Kirkland and Redmond, the report said.

Office buildings north and south of downtown Seattle fared relatively well. Rents remained relatively unchanged in the first quarter, Cushman & Wakefield said, while Colliers reported vacancy rates actually declined slightly from the previous quarter.

Some businesses are moving to those areas from downtown, Christian said, and Boeing — a major influence in both areas — has been relatively stable."

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I think Ben has a migraine.

CRE Outlook 2009 By Richard Parkus, Head of CMBS Research

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I think Ben has a migraine.

In red:
Yep. There are franchises that specificly track with a particular retailer. If the big box moves in, so do they and vice versa. An example would be Target. When target anchors a mall Old Navy is there, so is Footlocker and many other narrow retailers that cater to the demographic of the anchor. It goes beyond that though. When a Target anchors, the out parcels are populated by its symbiots as well. The Red Lobsters, Catos, Goodys, etc..
While many anchor symbiots are stand alones in smaller markets, they need the traffic a big box retailer generates in order to compete in a more crowded urban area.


In blue:
Heres a nasty little secret for you. Most major malls are built with tax incentives, we all know that. What most do not know is that almost ALL large scale projects like malls and stadiums are only built when the minicipality agrees to accept ownership and financial responsibility after a certain milestone or time period. In Memphis a huge Pyramid was built, the pride of the city for years, what many didnt know was that the ownership reverted back to the city when the original leases were up. It has stood empty for several years now, with the taxpayers footing the maintainence and security. The property is "too valuable" to lease for the market rate but tearing it down would bankrupt the city. This scenario is repeated in every major market simply because that is how cities attract revenue today. On the backs of residents tomorrow.



Good Luck

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TnTrader's Articles and Commentary

https://www.triond.com/users/TnTrader

Was only a matter of time....

"General Growth files for bankruptcy protection"

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I think Ben has a migraine.

Ackman Sees ‘Zero’ Chance of General Growth Fire Sale

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I think Ben has a migraine.

Fed’s Bear Losses Dominated by Commercial Real Estate

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I think Ben has a migraine.