Commercial Real Estate Blog

Though likely not surprising to anybody, year over year investment sales both in the United States and on a worldwide basis are down dramatically. According to a Jones Lang LaSalle (NYSE:JLL) report cited by NREI, first quarter investment sales in the US came in at $39.2 Billion, a number which is down 69% from the year ago period.

Internationally, investment sales during the first quarter were $154 Billion, which is down 46% less than the $283 Billion number from a year ago. This statistic was provided by Real Capital Analytics.

There is a lot of money currently waiting on the sidelines to acquire assets, but for the time being sellers are not conceding much on price. That might change though over the course of the next one to two years as loans mature. As Macklowe Properties found out, refinancing a short term loan in this market is difficult to do. If owners don’t can’t meet the heightened equity requirements currently facing those looking to acquire or refinance assets, they might be forced to sell.

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.

For months now we have been hearing of the downturn in the residential market and the subprime woes that have put a stranglehold on credit. The media has been all to focused on the residential market because that is what most people on the streets are concerned with.

We are starting to see the mass media picking up more stories related to commercial real estate woes that exist in the market. The Wall Street Journal has published an article discussing some of the problems that the credit turmoil has created in the commercial property market.

The fallout has hit some players in the commercial property market hard, amongst them Centro Properties, the fifth largest owners of shopping malls in the US. Centro’s stock price dropped more than 90% in two days after it was revealed that it is struggling to refinance $6.2B of short-term debt it took on to finance its acquisition of New Plan Excel.

The difficult Centro faced was that it initially planned to issue CMBS (commercial mortgage backed securities) to convert its short-term debt into long-term debt. With the CMBS market in the tank, Centro and other players are facing an uphill battle in raising new debt, and existing property owners are facing drops in property values.

Earlier this year we detailed Harry Macklowe’s time bomb as he is also trying to secure financing to cover the short-term debt he took on earlier this year in his $7.1B acquisition of Manhattan properties.

The dry up of the CMBS market leads to the drop in sales activity, and ultimately in sales prices. In fact, according to Real Capital Analytics, sales of large office properties fell 55% from November 2006 to November of 2007.

Too many risky acquisitions have taken place based on future cash flow projections and until that “backlog of inventory” is flushed out, the CMBS market will likely remain in its current state. That is not to say deal won’t get done, but they’ll be far and few between and any buyer’s will likely command a premium spread.

The sentiment has been changing for sometime and it will likely continue to deteriorate as seller’s willingness to drop prices is only a function of the time it takes for them to realize that.

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.