Commercial Real Estate Blog

After seeing rents continuously rise over the past 24 to 36 months, Tenants are finally beginning to see an easing in rental rates. During the past two quarters, net absorption in the South Bay and Peninsula markets have either been flat or mildly negative. In the Silicon Valley, depending on whose numbers you use, net absorption in the first quarter was in the range of minus 50-100k. At the same time rents remained fairly static.

Landlords, experiencing a marked slowdown in leasing activity have now begun to question the strength of the market. In some instances, Landlords are keeping asking rents up but getting more aggressive in providing concessions. Equity Office, which first used this approach with some of its projects, has now begun to actually lower their asking rents in some of their projects.

It helps to understand how the debt markets had an impact on the rapid rise in rents, and what could be the beginning of a period of weakness in the markets. During the past several years, cheap financing coupled with lax lending standards allowed investors to buy and sell buildings and projects at an unprecendented rate. 

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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.

After taking control of a $7B portfolio of properties from Equity Office last year, Harry Macklowe’s financing situation is rumored to have led to a deal to relinquish control of his properties to his lender, Deutsche Bank.

His financing package, when he acquired the buildings, only required him to put $50M worth of equity into the deal. In addition however, Macklowe was required to provide a personal guarantee of $1b for the deal.

As a result, CBRE has been retained by Macklowe to sell his trophy asset, the GM building in New York, possibly to help satisfy his obligations. The GM Building which Macklowe picked up in 2003 for $1.4B is estimated to be worth north of $3B.

The commercial paper market has taken a bite out of some investors but fortunately it seems that it is a manageable exit for Macklowe and the market.

There have been a lot of articles over the course of the past month and a half outlining the tightening standards lenders are enforcing for both commercial and residential property transactions. Many of us in the business were aware of acquisitions taking place involving loan-to-value and debt-service coverage ratios which deviated from what credit markets were typically accustomed to seeing. An article in last week’s Wall Street Journal however shed light on the extent to which underwriting standards had loosened.

Macklowe Properties, a large real estate holder was able to secure funding for a $7.6 billion dollar acquisition of NYC property with only $50M of equity put into the deal by Macklowe. While the loan is a recourse loan, it is an excellent example of how loose lending standards had gotten. So long as commercial property prices continued to increase, lenders had a safe exit and borrowers continued to make huge returns on investment quickly flipping properties. As the market has now turned, it seems Macklowe Properties might be left without a seat if the music does ultimately stop and they are unable to find a way to repay their loans.