Tishman Speyer and Blackrock Hand Over the Keys to Stuyvesant Town and Peter Cooper Village

By now you've probably heard that after defaulting on loan payments Tishman Speyer and Blackrock are handing over the keys to Peter Cooper Village and Stuyvesant Town (If you haven't, click here). While TSP and Blackrock could instead have tried to put the project into bankruptcy, it looks like they'd prefer to try to put this whole ordeal behind them; and an ordeal it has been.

To sum up the history, Tishman Speyer (TSP) and its backers purchased Peter Cooper Village and Stuy Town from MetLife at the top of the market for the highest price ever paid for a single real estate project about 5 and a half billion dollars. As was typical of the time, they highly leveraged the purchase with not just a mortgage, but also over a billion dollars of mezzanine debt (in a future post I'll finally get around to explaining how the capital stack works and doesn't work, and why lots of landlords are going bust, and will continue to go bust!). In order for the purchase to make any sense (i.e. make a profit on it), TSP had to be able to destabilize many of the apartments. Simply by cracking down on tenants already in violation of the rent stabilization laws, and making renovations to apartments that were vacated TSP was pretty sure they could do this. Many other landlords had done it successfully before, and TSP checked on the law and it looked good for them. Once TSP destabilized these apartments, by virtue of the work they did to them and the upgrades to the complex, they expected they could charge top dollar.

So to be clear, there were two things that needed to happen to stop this project from going bust:

1) Destabilize a lot of apartments

2) Charge a lot of money for the apartments once they're destabilized

If you read this blog or have been following the news, then you will have learned, that as a result of the J-51 ruling, Tishman Speyer's attempts to destabilize the apartments have failed. This isn't due to a lack of precedent or sound planning on TSP's account. This is because the judges decided to ignore precedent, reinterpret law, and wipe out the investment of many companies and individuals. For my take on this whole thing see: "'By Virtue Of' or Stuyvesant Town, Peter Cooper Village & J-51 - What it all means . . ." I also reported on the ultimate ruling here.

Given what TSP paid for the complex, it is possible, but unlikely that they could have survived the court decision on the J-51 matter, but then the second hammer fell - the economy. For the apartments that TSP was able to destabilize legally, or which already were destabilized, they can't charge nearly what they wanted to. The market simply isn't there to support it . . . and that's the beauty of a FREE MARKET. For why the rent regulation in New York City is a sham,see this post.

At the end of the day, the double whammy of the J-51 ruling and declining free market rents forced TSP to hand back the keys. Even if TSP could refinance, it simply wouldn't make any sense, the deal is far too lopsided. Lucky for Jerry and Rob Speyer, they didn't have too much of their personal money in the deal.

For your reference, below is the letter that residents of Peter Cooper Village and Stuyvesant Town received today.

Good News Friday from Grubb & Ellis Chief Economist Bob Bach

The Inventory Story

Following a lengthy 13-month liquidation cycle, business inventories grew by 0.4 percent in both October and November. Higher inventory levels among manufacturers and wholesalers in November more than made up for a slight dip in retail inventories. The inventory/sales ratio fell to 1.28, its lowest level since July 2008. With this ratio back to pre-crisis levels, businesses are poised to increase inventories this year, which will translate into higher levels of factory production. This is one reason why the industrial market is likely to be one of the first commercial real estate sectors to begin a recovery.

Another type of inventory – the inventory of office space available for sublease – fell in the fourth quarter, closing out 2009 at just under 120 million square feet. This was the first decline following nine consecutive quarterly increases. Some of this inventory reverted back to the landlord as the leases expired and will show up as direct lease space, but much of the decline came as tenants subleased space at market-clearing prices. Falling sublease inventories typically precede the beginning of a broader market recovery.

Deutsche Bank Outlook for Commercial Real Estate and Its Implications for Banks

Deutsche Bank just came out with their Outlook for Commercial Real Estate and its Implications for Banks. Here are some highlights:

– Commercial real estate faces significant challenges over the next 3-5 years

– CRE fundamentals (rents and vacancy rates) will continue to deteriorate, in some cases for several years

– Defaults on CRE debt will continue to climb over the next 18-24 months, reaching historically high levels

– CRE likely to face a severe refinancing issues over the next 3-5 years, even if CRE fundamentals improve

– In CMBS, refinancing challenges are likely lead initially to widespread maturity extensions and ultimately to widespread restructuring and foreclosures and liquidations, creating large losses for CMBS trusts

– In banks, CRE exposures are likely to lead to hundreds of billions of dollars in losses and many hundreds of failures

– The sooner losses are written-off, the sooner assets will begin to trade and the sooner the CRE market will begin to normalize

To read the full report, click here.

Robust Leasing Activity Despite Slight Increase in Availability—Grubb & Ellis New York Office Market Trends—4Q 09

Fourth Quarter 2009 Office Market Highlights:

• Availability increased by 10 basis points to 14.6% despite strong fourth quarter leasing activity
• Lease renewals accounted for 60 percent of deals signed for 100,000 square feet and greater
• Generous concession packages helped drop net effective rents to a five-year low
• Availability should peak in mid-2010

Click here for the latest report!

Grubb & Ellis 2010 Real Estate Forecast

Every year Grubb & Ellis publishes a real estate forecast for more than 100 local markets throughout North America. The in depth reports include predictions for all aspects of the commercial real estate market including overviews for office, retail, investment, industrial, multi-housing and land.

To view the forecast for your particular market and interest, click here.

For a link directly to the NYC forecast, click here.

For more info. on the NYC market, call me - 212.326.4955.