The news out of New York today is that:

A group led by Tishman Speyer Properties has decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to its creditors in the collapse of one of the most high-profile deals of the real-estate boom.

The decision comes after the venture between Tishman and BlackRock Inc. defaulted on the $4.4 billion debt used to help finance the deal. The venture acquired the 56-building, 11,000-unit property for $5.4 billion in 2006—the most ever paid for a single residential property in the U.S. The venture had been struggling for months to restructure the debt but capitulated facing a massive debt load and a weak New York City economy that has undercut rents and demand for high-priced apartments.

via Tishman Venture Gives Up Stuyvesant Project – WSJ.com.

Unfortunately, this deal was done at the height of the market. The owners were expecting to be able to raise rents on many of the units to market rates. A lawsuit by tenants halted the owners’ plans and eventually the tenants won.

The interest reserve ran out earlier this year and the owners decided to turn the keys over to the lenders.

Now the property is whispered to be worth only $1.8 Billion, less than half the purchase price and less than half the $4.4 Billion debt used to finance the project. Many of the lenders are going to lose money on this project as well as the loss to the equity investors.

This project should serve as a monument to commercial underwriters to be careful when using forecasted rental income to determine value.

(Photo: stuyvesant town by dandeluca)

CoStar.com is reporting that Opportunities Mount for Distressed Office Buildings, But Few Are Trading.

According to the report there are currently 19,600 office buildings with vacancy ranging from 60-100% of the office space. According to the chart compiled by CoStar San Francisco has 125 buildings in this category and the Oakland/East Bay has 208 buildings.

The article also reports few if any sales of these distressed assets.

The reasons for the dearth of deals appear to come down to three primary factors: the pricing disconnect that exists due to rapidly declining market fundamentals, tightened credit conditions, and a lack of appetite for risk on the part of [both] lenders and investors.

A Matter of Perspective

The answer CoStar provides is exactly correct and comes down to a matter of perspective.

Sellers tend to be optimistic about the future value of assets and buyers tend to be pessimistic or at least realistic. Sellers foresee rental rates rising and demand picking up for commercial office properties. This perspective motivates sellers to hang on to the property until a buyer who recognizes the “true value” of their property or they are forced to sell through foreclosure.

Buyers realize that though the seller may expect rents to increase, there is no guarantee that this will actually happen. Buyers want to pay a price based on actual rents, if not decreased rental rates due to the over abundance of office space. Buyers with this perspective will hold out until they can buy a property that meets their criteria.

Leverage Has Left the Building

A lot of the value attributed to office buildings in the past five years was a product of the ability of buyers to leverage the properties to such a degree that even a slight increase in rents or occupancy gave a nice bump to their rates of return.

With 80-90% loan to value leverage, unavailable buyers need to have a greater upside in relation to the purchase price to get a compensating return commensurate to the risk they are taking on.

A Staring Match

It has become a staring match of sorts. Neither side wants to show weakness and neither side is ready to admit defeat.

Until one side concedes defeat, the staring will continue and properties will remain unsold.

Who will blink first? Will it be they buyers or the sellers?

In need of new sources of funding, brokers are calling lenders they have never reached out to before. Too often, the broker in the first 30 seconds is unable to make a solid impression on the lender to establish a long-term relationship.

Phone Etiquette

In the first 30 seconds you can make a good impression with the lender and establish a solid relationship with them. Or in the first 30 seconds you can demonstrate incompetence and a lack of civility towards the lender.

Here are some tips of what to do in the first 30 seconds of your initial call to set up a solid long-term relationship with a lender.

Repeat and use the name of the person who answers the phone. This helps you to connect with the person. If you have a short memory or forget names, write the name down so that you can reference it throughout your conversation.

Keeping the person’s name may help you the next time you call with a loan request. You will know with whom you spoke previously and can use your previous contact to build rapport.

Do not ask how the person is doing. Most of the time we ask out of a sense of “social propriety”, not out of genuine concern. What would you do if the person on the other end of the line answered “Terrible!”?

This can be awkward:

Lender: Hello this is Frank.

Broker: Frank, how are you?

Lender: Fine. How are you?

Broker: Good thanks.

Lender: Who is this again?

Next, clearly state your name, company, and briefly describe what you need in 30 seconds or less. “This is Peter from Owens Financial Group. I am calling regarding an office complex in Seattle worth $4 million in need of financing for $2.75 million.”

This is your “elevator pitch” of the project. In order to effectively make the pitch, you must have studied the financing request. You must know the location, loan-to-value ratio, loan amount, and property type in order to make this statement in 30 seconds.

Finally, end with a question about the lender’s ability to do this deal. You don’t want to leave the lender wondering what they can do for you.

“Can you finance an office property at 69% of value?” Or “Do you handle commercial construction projects like this in Idaho?”

I would advise against asking a question about pricing. If the lender is unable to finance your project, price doesn’t matter. You are requesting them to answer a fruitless question.

Summary

By knowing in advance the reason of your call and details of the deal, you evidence your professionalism and that you value the lender’s time. It also prepares you to leave a detailed message for the lender if they are unavailable at the time of the call.

When making a phone call, you want to establish rapport and accomplish the purpose of the call. Getting off on the right foot is imperative to achieving this goal.

According to the WSJ.com in Condo King Corus Weighs Its Options, Corus Bankshares, Inc.

is one of the few lenders to report that the Treasury Department intends to reject the bank’s application for funds from the Troubled Asset Relief Program, or TARP.

Ouch! The bank must be in trouble if they are admitting that they were rejected by the Treasury Department.

Corus has about $2 billion in unfunded construction commitments and that in the event of a federal takeover, regulators wouldn’t be obligated to fund these commitments.

This would be a major disaster. The article doesn’t specify how many projects this is spread over, but imagine if all of them were forced to stop mid-project.

Corus funded condo projects nationwide could come to a standstill. Depending on the FDIC’s decision, some of these projects could languish incomplete for a long time.

This is shaping up to be a huges mess.

Commercial mortage brokers get paid based on the value they bring to the client in a transaction. The truly successful brokers bring value to their clients consistently.

2009 forebodes to be a difficult year for certain commercial real estate sectors. Much in the residential real estate industry has changed since 2006, we can expect similar changes in the commercial real estate. They key is to be one of the survivors that come out on the other side.

Adding Value

Most borrowers would not pay a broker’s fee if they did not get something in return for it. A commercial mortgage broker must provide something  the client “needs”.

The client may “need” a smoother transaction, a greater selection of lenders, a higher LTV, a lower rate, or more flexible loan covenants. In exchange for this the broker receives their loan fee.

All of these were solutions to problems that a broker could provide that might not have come through direct contact with an institutional lender

In the current market brokers are having more difficulty providing these items of value. LTVs have decreased, rates have gone up, and many banks are only lending to existing customers.

How does a broker survive and add value in this market?

Bring Equity

A broker that was able to provide an equity injection to a property that needs refinancing will have no shortage of business. Borrowers that cannot qualify for a refinance with new, lower values may be open to a fresh equity injection to facilitate the refinance and ownership of their property.

Offering this as a solution to a borrower’s problems will make it more palatable. Many borrowers may balk at this idea at first.

However, if the only alternative is foreclosure, this idea is likely to become less offensive.

Finding Equity

This will require some work on your part as the broker. Finding reliable and reasonable sources of equity capital. The equity investor must have the funds available to respond quickly. They also must not be so greedy as to kill a deal and offend your borrower.

One way to do this is call your existing database to see if they know anyone that might be willing to invest in projects for an equity position. Some of your existing clients may have extra cash that they would be willing to invest in the right project.

The deal structure will need to be worked out between your equity investor and the borrower.

Commercial mortgage brokers need to continue to add value to their clients’ transactions in this difficult financing environment. How do you plan to do this for 2009?

Photo credit: somethingstartedcrazy

Jonathan Miller over at Trend Czar has an interesting post on the near term pain in commercial real estate. He also suggest niche markets that commercial real estate brokers and other commercial real estate professionals should focus on in 2009.

For brokers and other intermediaries, business won’t suddenly ramp up for quite a while unless they specialize in helping broken borrowers find refinancing or fire sale foreclosed properties for lenders.

Near-term lawyers can do well on the workout front and representing various tranches, special servicers, borrowers and lenders who are tangled up in all the CMBS and CDO litigation on the horizon. But before that happens banks and institutions have to begin writing down their portfolios. That will captivate all of us before 2009 is over.

Trend Czar: Debt Burdens–Stream of Consciousness.

The New York Times is reporting on the spreading vacancy issues in commercial real estate. Office and retail sectors are being hit the worsth.

Much of this affect is due to the prediction that 2009 is going to see a contraction in the U.S. economy. Companies are not looking to expand into new office space. In fact most companies are cutting back on staff and are paring down the amount of office space they are willing to use.

Houston, like Dallas, held up while many other cities were showing the strains of an economic slowdown. But job growth and the brisk business of oil and gas exploration have come to an abrupt halt.

Vacant or unfinished shopping centers dot the highways. Among the 8.4 million square feet of office space under construction or recently completed in the metropolitan area, 80 percent has not been leased. As a result, the vacancy rate is 11 percent and rising.

This is a very well written article and paints a valid portrait of the situation commercial real estate owners are facing. It is well worth the read.

(HT: Calculated Risk)