Commercial Real Estate Blog

The lender that was honored as “Lender of the Year” for 2006 just two short years ago has now seen itself get sold to Citigroup for next to nothing. Wachovia, who held the position as the largest commercial lender and servicer in 2006 is now gone. Wachovia generated in excess of $60B in commercial mortgages in 2006, and serviced nearly $180B in mortgages and CMBS that same year.

We are really in the midst of something historic here, as a huge consolidation of power and wealth is happening right under our noses, and we are paying for it. If you’re familiar with the Panic of 1907, you will see that history is suspiciously repeating itself, and if there is a lesson to be learned, it is that JP Morgan Chase Bear Stearns Washington Mutual will definitely survive, and that Bank of America Countrywide Merrill Lynch US Trust LaSalle, Barclays Lehman Brothers, and Citigroup Wachovia will likely be right there too.

Though it seems a final deal has yet to be finalized, it seems JP Morgan Chase will be suitor for Washington Mutual, or at least a portion of its operation according to multiple reports. Washington Mutual put itself up for auction last week, and a number of banks came forth to evaluate it, including Citigroup, HSBC, and JP Morgan Chase.

Washington Mutual, despite being mired in bad debt and writedowns still is a bank with a strong and well-located branch network. It was clear that to anybody looking to “head west” and establish themselves in key markets like California, Washington Mutual would be a likely target. What exactly Chase will be acquiring will remain to be seem, but it is very likely that the retail branch network, at least in key west coast markets, will be a part of that deal.

In what is one of the most fantastic days in modern financial history, Lehman looks to be headed into bankruptcy as potential suitors Barclays and Bank of America have walked away. Meanwhile, Bank of America has reached an agreement to acquire Merrill Lynch.

These two moves likely won’t be the last as attention will likely next turn to Washington Mutual in the coming next week or two. Attracted to Washington Mutual’s strong and well-located branch network, it’s likely a suitor will be found to take over. My money is on JP Morgan Chase to do that deal.

USBanker Magazine is featuring an article in its September issue discussing the impact of the current financial turmoil on office space vacancy rates. According to the article, New York’s Independent Budget Office is forecasting roughly 60,000 total job losses stemming from the credit crunch. The CEO of New York’s GVA office has estimated that as much as 3.7 million square feet of space can come back on the market in the next quarter alone as companies such as JP Morgan (Bear Stearns) dump or attempt to sublease space.

Of all the markets with the largest financial exposure (New York, Boston, Chicago, San Francisco), Orange County has been the hardest hit with 3-4 million square feet of space combing back online on top of the 8 million square feet of new construction. The vacancy rate there according to the article has risen a thousand basis points in one year alone.

In commercial real estate, the best buildings tend to maintain the highest levels of occupancy, even in a downturn. As the market softens, tenants try to take advantage by moving into better buildings.

I suspect what we’re seeing right now in banking will be similar to what happens in commercial real estate. As the media continues to put a spotlight on troubled financial institutions, depositors in those banks are very likely to withdraw their funds and seek a safe-haven. That safe haven is likely to be this country’s largest banks, such as Bank of America, Chase, Citibank, and Wells Fargo. Bank of America alone, for instance, holds about 8-10% of this nation’s deposits.

The Fed’s recent actions to help stabilize economic conditions are not impressing foreigner’s holding US debt instruments. The inflationary actions of the Fed have resulted in foreign buyers of US debt to essentially boycott government auctions for treasuries.

Over the past eight weeks, the share of foreign buyers participating in these auctions was somewhere around 25%. In last week’s auction, they represented only 5.8%.

Additional steps the Fed has taken or will take this week include bailing out Bear Stearns by essentially financing a JPMorgan takeover of Bear Stearns. The emergency overnight rate for bank’s was cut by 25 basis points, and in the Fed’s next meeting, they might cut interest rates by as much as seventy five basis points.

Unfortunately though, the Fed can only control short term rates. What the Fed cannot do is control long term rates and that is what will affect commercial real estate going forward. The current economic conditions, compounded by inflationary pressures and increasing long term rates does not bode well for holders of such real estate. What we see is people continuing to be bullish in certain market sectors, but it is hard to see how they envision that some sectors, such as Silicon Valley, will escape unscathed.

Time will tell who is right, but with a weakening dollar and thereby increasing commodity prices (for those priced in US Dollars), the effect will be felt in Silicon Valley. We are seeing some Venture Capitalists increasingly wary of their ability to raise any more money in this market and have become increasingly conservative in placing investments.

This has already and will continue to have an impact on the Silicon Valley Market.

Mozart Development has sold Mathilda Place to JP Morgan  Asset Management. The sales price is reported to be $270 million dollars ($575 psf) and represents a 4.5% cap rate.

The property is a three-building, 472,500 SF office campus sitting on 2.25 acres in the Sunnyvale Town Center. The project was constructed in 2002 and includes 4-levels of underground parking. Tenants include Broadcom, Seagate, and Impac Medical, in addition to a smaller set of tenants which occupy some floors which were converted to multi-tenant floors around 2005. Large portions of the project remained vacant for a few years after construction as the market began its slide in 2001-2002. JP Morgan likely will look to bump rents significantly on the smaller multi-tenant spaces which were leased from 2004-2006 to improve cash flow and bump up the going-in yield.

It is not evident what will happen to the Broadcom space as they will likely be departing Mathilda Place for a TBD corporate campus, likely to be located somewhere within the Golden Triangle.