Peter Pays Paul

East Palo Alto, in the San Francisco Bay Area, is suffering due to the default of the city’s largest landlord. The WSJ details the plight in Firm Takes Heat Over East Palo Alto Crime.

A wave of robberies and burglaries is hitting East Palo Alto, threatening to reverse the city’s recent period of stabilization. One reason behind the crime surge is the financial troubles of real-estate firm Page Mill, say locals, law enforcement and other officials of the town.

Page Mill Properties LLC, which began snapping up local apartments in 2006, became the city’s biggest rental-unit landlord and attempted to transform the town by redeveloping properties into higher-end condominiums.

Earlier this week I wrote about San Francisco’s Apartment Woes caused by the default of the Lembi family.

In both of these scenarios, inexpensive CMBS debt allowed the investor to buy property at unrealistic prices. “A rising tide floats all boats.” The acquisitions made sense so long as the price of real estate was rising and cheap debt was available.

However, once real estate values began to fall, financing dried up, and vacancy began to rise these over-leveraged investments don’t make sense and don’t cash flow. Lax underwriting by the CMBS issuers and unrealistic assumptions by borrowers are damaging the cities where investments were made.

Hopefully, the commercial real estate industry will learn from our mistakes and excess before this cycle is repeated.

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