The Wobbly Skyscraper

Loan defaults in the worst commercial real estate market in decades have created tens of billions worth of distressed properties across the United States, sometimes forcing cut-rate auctions of landmark skyscrapers. Developers are falling behind on mortgages as tenants leave and can find no financing to cover payments.

So they are selling skyscrapers at a drastic discount, with the condition that the new buyer take on the enormous amounts of debt connected to the properties. "Just imagine in a residential market, if there weren’t 80 per cent loans available for everyone. If everyone had to buy their houses in cash, the values of houses would plummet everywhere," said Dan Fasulo, a managing director at Real Capital Analytics. "That’s happening on a massive scale on the commercial side." The Hancock Tower and the Sixth Avenue building are the first of a wave of foreclosures and auctions expected in the next year that will slash sale values of formerly prime real estate.

"This is a train wreck that’s coming in the large office towers," said Matthew Haines, chairman of the Propertyshark.com real estate website.

Real Capital Analytics, which tracks commercial real estate transactions, counted over $86 billion worth of distressed properties in the country as of April, over $6 billion in Manhattan.
Many of the towers that are likely to go up for sale were bought at inflated prices during the boom three to five years ago and could lose over half their value at sale.

The MIT Centre for Real Estate said last week that commercial property sales in the first quarter fell by six per cent from the end of last year, and were down 21 per cent down from the same period a year ago. And on Wednesday, the National Association of Realtors said its index of commercial brokerage activity fell almost 13 percent from a year ago.

Sales volume is "historically low. It has never been this low. It has never even been half this low," Geltner said (research director at MIT Centre of Real Estate).

The only major property sales that are likely in the next several months, analysts say, are distressed properties with delinquent loans.

"No healthy owner in their right mind would try to sell a property in this environment," said Fasulo. He said devalued sales of skyscrapers represent "a trickle right now. It will turn into a flood over the next 12 months." ~ By AMY WESTFELDT The Associated Press NEW YORK


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CRE - Rebound In Sight?

So the U.S. commercial real estate sector declined at the beginning of the year, according to the National Association of Realtors, which said on Wednesday its index of brokerage activity in the sector fell 4.8 percent in the first quarter from the fourth. Activity was also 12.9 percent below the first quarter of 2008, NAR said. "Significant job losses have reduced the demand for commercial space, while a lack of credit has stalled transactions and refinancing activity," said the association's chief economist, Lawrence Yun, in a statement.

Treasury Secretary Timothy Geithner said the keys are putting "more capital where it is necessary and getting the securities market back to the point where they can help refinance viable projects." The Federal Reserve has offered some relief by opening its $200 billion Term Asset Backed Securities Loan Facility to AAA-rated commercial mortgage-backed securities, he said. "The Fed announced yesterday a very important step that's going to extend this program to commercial mortgage-backed securities -- newly issued securities and legacy assets in that area," he said. "The market responded quite favorably because the availability of financing in those markets will help get those capital markets going again."

The NAR said commercial real estate activity, which encompasses the finished construction of buildings and their sale and leasing, will continue to decline for the next six to nine months. "Because commercial real estate always lags an overall economic recovery, it will take some time for the commercial real estate market to rebound," Yun also said. The association, which represents 1.2 million professionals in residential and commercial real estate, projected that vacancy rates in office buildings will reach 16.1 percent in 2009, up from 13.4 percent in 2008, and will rise again to 20.4 percent in 2010. Retail vacancy rates will likely increase to 12.1 percent in 2009 from 9.7 percent last year, and will spike to 15.8 percent next year, the association said.

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