Real Estate Chat

Landmark Purchasing vs. Maintaining January 26, 2010

Source: NY Times

Author: Charles V. Bagli

URL: http://www.nytimes.com/2010/01/17/business/17tish.html

“Buying Landmarks? Easy.  Keeping Them? Maybe Not.”

IT seemed a great idea at the time. In June 2007, Jerry I. Speyer and his son Rob bought six buildings in Chicago, making them one of the largest commercial landlords in the city.

The Speyers, who focus on prominent towers like Rockefeller Center and the Chrysler Building in Manhattan that are packed with blue-chip tenants, were elated. They had captured several buildings at the heart of Chicago’s business district, including the sprawling Chicago Mercantile Exchange and the stately Civic Opera House.

But within weeks, nearly everything went wrong. The Speyers, who are co-chief executives of Tishman Speyer Properties, had counted on selling three of the buildings to pay down $1.4 billion in loans used to finance the deal. But they could unload only one. Soon, the commercial vacancy rate in Chicago climbed to 15 percent, and property values plummeted.

Now the Speyers are in tough negotiations with a representative of the Federal Reserve Bank of New York to restructure the loans on the Chicago properties. If those talks fail, the ownership group led by Tishman Speyer could face foreclosure. The Fed inherited the debt in 2008 when JPMorgan Chase bought the original lender, Bear Stearns, and the government took on many of its troubled assets.

As it happens, Jerry Speyer was a director of the New York Fed from 2001 through 2007. The Federal Reserve, meanwhile, has hired the investment firm BlackRock to handle the negotiations on its behalf.

“We clearly bought the real estate at the top of the market,” Rob Speyer, 40, said in an interview at the company’s Rockefeller Center offices. “In retrospect, we overpaid.”

Much as they charged from deal to deal a few years ago, the Speyers are now shuttling from one troubled asset to the next. This month, a joint venture of Tishman Speyer and BlackRock defaulted on a $3 billion mortgage for Stuyvesant Town and Peter Cooper Village in Manhattan. The partners’ purchase of these huge apartment complexes in 2006 — for $5.4 billion — is now regarded as a high-water mark for an overheated, speculative market.

Tishman Speyer also has its hands full with two other sour deals: the $22.2 billion acquisition of Archstone Smith, a company that owned 70,000 apartments, and the $2.8 billion purchase of CarrAmerica, which owned 26 office buildings in Washington, a city where vacancy rates have hit a record level.

“Anybody who bought property in the last six years has their equity pretty well washed out,” said Ray Torto, chief economist at CB Richard Ellis, a real estate firm. “People are looking back on that period as the peak of the madness, the bubble. The expectation was that there was always someone who would pay a higher price after you.”

Instead of rents and values rising unchecked, the value of commercial office buildings in the United States has dropped 43 percent, on average, since November 2007, according to economists’ estimates. If unemployment continues to rise, an ugly situation could turn nightmarish.

Caught in the same riptide as many of their competitors, the Speyers now spend much of their time locked in rooms with bankers. Lenders are deciding whether to restructure the loans by extending the term and offering lower interest (in return for more capital from the Speyers and their partners), or to simply foreclose and hope the assets will be worth more in coming years.

THE travails of the Speyers are not that different from those of other investors who poured ever-larger sums into real estate during that delirious period when every day seemed to bring another gigantic deal at a record-breaking price. But the Speyers’ problems are unlikely to break the firm or mimic those of Harry Macklowe, whose debt-fueled, $7 billion acquisition of seven Manhattan office buildings ultimately sank much of his real estate empire.

The biggest risk the Speyers now face is to their reputation, not their bank accounts.

Tishman Speyer manages a $33.5 billion portfolio of 72 million square feet of commercial space — the rough equivalent of all the office space in Houston and Los Angeles combined — on four continents. (Those numbers do not include residential properties like the Stuyvesant Town and Archstone apartments.) Most of the property is purchased with other people’s money, be it the Crown family in Chicago, the government of Singapore, the Church of England or Calpers, the giant California pension fund.

Investors typically put their money into an investment fund established by the Speyers and expect, say, a 20 percent annual return. The fund, in turn, buys a series of properties or projects, with or without partners. Each deal involves a single-purpose entity or corporation to invest the equity and take on debt. This means that if the deal goes bad, the lenders can take back the property, but they cannot seize other assets owned by the fund or demand that Tishman Speyer make up for any losses.

Tishman Speyer, which has no corporate debt, earns fees for developing and operating the buildings but usually puts little of its own money into a deal.

In the $5.4 billion Stuyvesant Town deal, for instance, BlackRock and Tishman Speyer invested only $112 million each of their own money, which they have written off. Jerry and Rob Speyer personally contributed $56 million of Tishman’s share. Real estate and bank executives say Tishman Speyer took $18 million a year in fees; company executives say they began waiving the fees in fall 2008.