Commercial Real Estate Blog

Landlords across Silicon Valley are working hard to get space leased, and in the process are offering everything from teaser start rates to bonuses to the brokers. In fact, in the past two months we have seen a dramatic increase in the number of landlords who are looking to entice brokers by providing them with bonus payments for bringing them deals.

My feeling is that unless we see some positive absorption, these types of bonus commission payments are not only likely to increase, but more and more landlords will move beyond them and lower their asking rents as well. Some projects have dramatically reduced their rental rates from the highs that were reached last year and earlier this year. For instance, Equity Office/Blackstone’s San Jose Airport portfolio has seen rents come down as much as 35-40% in some cases from the highs that were reached after Blackstone acquired the portfolio of buildings along Technology and Gateway Drives in San Jose and began to increase rents.

In fact, we have been advising clients for some time to effectuate shorter term deals if possible and not sign up for long term leases at above-market rates. The run up in rents in many submarkets was driven largely in part due to hype in the marketplace and people assuming that positive absorption would continue at the same pace. The reality was and continues to be that fundamentally, unemployment numbers in Silicon Valley are weakening, capital markets and the ability for companies to raise money remains difficult, absorption has turned down, and in the case of new buildings, the disparity in rents on new versus existing buildings remains large.

Interestingly enough, David Radcliffe, Google’s Vice President of Real Estate and a panelist at the CoreNet/ULI meeting on Corporate Campuses this past friday commented that their strategy right now is to sit tight in many instances as they see the risk of waiting to be minimal and really have no anticipation of any dramatic increases in rents happening.

We wrote a piece the other day about Lehman looking to shed $14B of its $40B in real estate assets. The financial times is now reporting that Lehman is now looking to dump $40B stake. It is expected to take a loss somewhere in the range of $1.5-3B. Buyers who are circling the assets (which consist of both debt and real estate) include Blackstone and BlackRock.

It might be a tough pill to swallow, but it’s probably a necessary evil to save Lehman Brothers. The sooner all the banks can stabilize themselves, even if it comes at a drastic cost, the sooner the credit and financial markets will see signs of normalcy. Up until then, jittery investors will shun both equities and debt.

Lehman Brothers (LEH: 0.00 N/A), in a move to raise capital and reduce its real estate exposure, is said to be in talks to liquidate about $14B in commercial real estate assets. Lehman is said to be in talks with BlackRock for the assets. Lehamn currently owns about $10B worth of real estate, and an additional $29.4B in commercial mortgages.

Last month, Shorenstein acquired a piece of mezzanine debt on McCandless Towers from Lehman Brothers. For the past few years, Lehman Brothers had been extremely prolific in mortgage backed securities, and in 2007 had underwrote more than any other firm. In addition, Lehman Brothers is selling apartments it acquired through the Archstone-Smith acquisition (which it partnered with Tishman Speyer on). In the past few months it has sold Archstone assets in Santa Clara and Dublin, and will be looking to liquidate others through the end of the year.

I’m not quite sure how the $14B number surfaced, but it seems that Lehman’s financial condition might just have it bailing out of nearly everything, stabilizing itself, and then when the bond issuance market returns, Lehman gets slowly back on the horse.

Over the weekend, the fate of the GM Building at 767 Fifth Avenue became known. Boston Properties and Goldman Sachs led an investment group that acquired the trophy asset along with other buildings from Macklowe Properties for $4B, $2.5B of which was assumption of debt. It’s rumored that middle eastern investors and sovereign investment funds are part of the investment group.

This deal highlights a tough 15 month period for the Macklowes which saw them make a spectacularly large acquisition of 7 buildings from Blackstone, only to default on the loans associated with the acquisition and finally the disposition of a dozen buildings totalling nearly 10 million square feet to escape financial ruin.

The elder Macklowe, 70, took on a $1.2B bridge loan from Fortress Investment Group which was recourse (meaning that the Lender, Fortress, could come after the personal assets of Macklowe). Part of the group’s personal assets (assets outside the investment vehicle created for the acquisition) was the GM Building which is likely now the most expensive office building ever sold.

It seems that the younger Macklowe is taking over the family empire from his father, who twice, has risked much at the wrong time and cost the family dearly, losing significantly both in the early 90’s and now. Of course, it must be said that the elder Macklowe has made many right moves as well, including the acquisition of the GM Building in 2003 for $1.4B, which has subsequently doubled in value.

After many months of speculation and the fact that Macklowe went into default on the short term loans he took to acquire a seven building portfolio from Blackstone (some details here), Macklowe seems to have lined up some buyers for his landmark GM building (which is also home of the Apple “Glass Cube” Store), along with other properties he controls.

In February it was rumoured he retained CB Richard Ellis to market and solicit bids for his building, which at that time was said to be worth north of $3 Billion. It appears, according to the WSJ, that a consortium of Middle-Eastern buyers along with Goldman Sachs, and Boston Properties have lined up to acquire the trophy asset in a $3.6B deal which includes some other buildings and developable land. The value of the GM building is pegged at around $2.8B, several hundred million less than what it was hoped the building would fetch.

This sale, if it goes through, would help make its lender whole, but due to tax implications and the need to pay off the existing mortgage, might mean that Harry Macklowe might still come up a bit short and might have to dip into other “personal savings” or assets to fully remedy the loans that were taken out to acquire the buildings from Equity Office/Blackstone.

Just two days ago Mort Zuckerman, Chairman of Boston Properties, was quizzed on an earnings call what his take was about the Macklowe situation. His answer was:

“Let me give you a nice vague answer to that question. You know our history and we have always taken a look at premier properties, which may fit very well into Boston Properties’ portfolio, as [Mike] mentioned. [Lots] of quality, location, et cetera.

We also have a history of not commenting on transactions or potential transactions that are highly speculative until such time as we feel that there is something to say that’s really — that has substance to it. So, I don’t think we can speculate on what the pricing of the Macklowe Properties will be or anything else. I mean, they’re — it’s a complicated transaction for whoever makes it and we’ll see what happens.”

What this deal shows is that while the effect of lax lending standards and the subprime mess continue to sort themselves out on the residential side, we’re just beginning to see the effects of the same on the commercial side. Some are able to structure deals allowing them to get out from under assets, but we’ll undoubtedly be seeing more and more situations in which the lenders are essentially in control of the sale.