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RREEF Portfolio Under Distress

July 28, 2009

RREEF was an aggressive acquirer of Silicon Valley real estate over the past several years. The acquisition spree began in earnest when RREEF acquired a large tract of R&D buildings in Silicon Valley from Equity Office. Following up that was the massive acquisition of the Peery/Arrillaga portfolio in 2006. The portfolio consisted of some 5M square feet of Office and R&D product in Silicon Valley built and amassed over the years by Dick Peery and John Arrillaga over the years. RREEF and GE Real Estate acquired the portfolio for some $1.1 Billion.

When RREEF acquired the assets, the portfolio was about 2/3 occupied. From a quick glance of RREEF’s available space, it seems the vacancy levels today remain at similar levels. Except what is missing is that the development market is gone, and there is continued pressure on vacancy rates to rise, and rents to fall. The price paid for the portfolio simply cannot be substantiated.

In fact, the overall portfolio was acquired for some $200 psf. Many of the buildings, which are sitting vacant today, are worth no more than $100 psf, and some likely as little as $50 psf.

Peery/Arrillaga really did a bang up job – they built buildings which they rented out for 80-90% of their (the buildings, not P&A’s!) useful lives, and then disposed of them as though the buildings were what the market wanted. The fact of the matter is that the RREEF portfolio consists, for the most part, of 1-2 story buildings that a large number of tenants simply are not interested in as they are dark, tired, and in need of extensive redevelopment or improvements.

RREEF was likely banking on the market to cooperate and help support a redevelopment effort of some sort, but that market will be lying flat on its face for years to come. As a result, we’ve heard that the debt on the project is “nervous” and that portions of the portfolio may end up back in the lender’s hands.

This news would not bode well for RREEF, who is also hurting on the Sunnyvale Town Center project, the JV with Peter Pau’s Sand Hill Property Company in Sunnyvale where RREEF is the major partner in the deal. That project has halted construction as financing for the deal has dried up.

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Categories: Commercial Finance and Lending | Commercial Real Estate Investing
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dkane July 29, 2009

Great post, you pinpointed the biggest problem with this portfolio which is that it was a deal deal driven by the nothing more than the availability of the debt. Fundamentally, the assets are tired, and over time fewer and fewer tenants will want these assets. They are now stuck in a position where the only option to exit the portfolio is foreclosure.

The other issue is that a large percentage of the portfolio is leased to tenants who are less than credit, and also on short terms – just look at all the buildings RREEF has in Santa Clara on Freedom Circle, Tasman, Great America, and on the south side of 101 (jay street, scott blvd, etc.)

A lot of the tenants they have are going to go away as the dry spell in VC continues.

I’m guessing the value of these assets have fallen by more than 50% from what they were acquired for.

ddm July 29, 2009

The RREEF/GE portfolio has no debt on it, so I would question your sources on the “the lender is getting nervous.” Not so with Sunnyvale Town Center, though…that one will certainly be one to watch…

squarefeet July 29, 2009

Thanks for the comment ddm, but your comment seems to imply that RREEF took down a $1.1 BILLION portfolio without debt on it. JP Morgan handled the securitization of the debt issued for the acquisition, and Fitch downgraded the issue last year.

If you search online you may find that the debt matured late last year, and that it was extended for an additional year.

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