Throughout this real estate bust I've been banging the drum that it was bad due diligence on real estate investments that led to to catastrophe, whether it was a young family stretching to buy a home, lenders funding a construction loan for a new subdivision or, more recently, private equity firms unloading trophy office properties. If you only trust those who are making money from your transaction, then you must be prepared for the consequences of such a decision. From a New York Times story:
In 2007, Sam Zell, the billionaire Chicago investor, sold a portfolio of 573 properties he had assembled over three decades, Equity Office Properties Trust, to the Blackstone Group for $39 billion. It was the largest private equity deal in history, but Blackstone did not stop there: it immediately flipped hundreds of the buildings for $27 billion. Today, the wreckage of those purchases is strewn across the country, from Southern California to Austin, Tex., to Chicago to New York. Many of the 16 companies that bought Equity Office buildings are now stuck with punishing debt, properties whose values are plummeting and millions of feet of office space they cannot fill... The impact could ripple beyond the companies that bought Equity Office buildings and the investment banks that financed them. If the owners cannot make their loan payments, it could create a financial crisis for the pension funds, hedge funds and insurance companies that hold securities based on Equity Office mortgages... Mr. Zell, who became chairman and chief executive of the Tribune Company after selling Equity Office, amassed his supersize real estate portfolio over many years. But the deal to sell the properties to Blackstone, the big private equity firm run by Stephen A. Schwarzman, occurred with lightning speed and what one executive who participated in the transaction called, “short-form due diligence.”... The buyers found lenders only too willing to finance as much as 90 percent or more of the purchase price, even as profit margins shrank, on a bet that rents and values would continue to rise. The investment banks, including Morgan Stanley, Wachovia, Goldman Sachs, Bear Stearns and Lehman Brothers, in turn collected their fees as they packaged the loans as securities and sold them to investors...
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Sunday, February 8, 2009
Bad due diligence leads to financial catastrophe for commercial property investors
Sunday, January 4, 2009
Office market imperiled for 2009
It looks like the next real estate domino to fall (after housing, retail and hotels) will be office space, with every market in the U.S. to suffer rising vacancies and falling rent. From a New York Times story:
Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.
With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market “since the wrenching 1991-1992 industry depression.”
Banks and other financial companies have not had the problems with commercial properties in this recession that they have had with residential properties. But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages this year.
The persistent chill in lending from banks to the credit markets will make that difficult — even for borrowers who are current on their payments — setting the stage for loan defaults.
The prospect bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities...Click here for full story.
