Commercial Real Estate Rumblings

Major rumors circulating that a major, international third party real estate firm is all but done for. Several large offices in the United States have closed in primary markets and the veteran brokers have fled. The old maxim that a company is only as good as its people epitomizes the commercial real estate industry. The only product they sell is the expertise and service of their people...when the people leave, there is no company. Stockholders don't seem to understand this.

In other news, secondary players like Maguire Properties have defaulted. Mid level firms in this category are taking it on the chin while larger corporations like Vornado and Tishman Speyer are proving vulnerable as well.

Each city/market/submarket will tell a different story. Underwater assets in D.C. as described in the article below, will be refinanced with more debt or bought by international money.

Tishman Faces Office Downturn
Portfolio in Washington in Default; If No Risks, 'Don't Have Any Rewards'

A partnership led by Tishman Speyer Properties is in default on debt tied to one of the largest office portfolios in the Washington area, the latest in a line of humbling turns for the prominent property developer.

Tishman Speyer paid $2.8 billion in late 2006 for what was known as the CarrAmerica portfolio, a collection of 28 buildings leased to law firms, lobbyists and other upscale tenants in and around Washington. But in taking advantage of the easy credit terms of the time, Tishman ended up overpaying.

With office vacancies rising and rents falling, the partnership has violated lender's covenants. Tishman also must find a way to refinance the debt when it comes due in 2011, something that analysts say could be a struggle.

Tishman Speyer itself isn't threatened by the problems.

Despite its size, CarrAmerica is one of the lesser-known investments in the Tishman Speyer empire, which includes Manhattan's Rockefeller Center and the Chrysler Building. In addition to the CarrAmerica deal, it also is facing stress from its other top-of-the-market acquisitions including Archstone-Smith, a high-end apartment real-estate investment trust, and the sprawling New York apartment complexes of Peter Cooper Village and Stuyvesant Town.

It is proving a test of the business mettle of Rob Speyer, a 39-year old former newspaper reporter. The son of Jerry Speyer -- former chairman of the board of the Federal Reserve Bank of New York and chairman of the Museum of Modern Art -- is being groomed to take over Tishman Speyer, a closely held 31-year-old firm that owns or manages real estate valued at over $35 billion from Brazil to Germany to China.

Like other deals done in the boom years, the CarrAmerica transaction was underwritten on the assumption that rents and occupancy would rise, not fall. Now, according to people familiar with the matter, the Tishman partnership has violated covenants on $200 million in its revolving credit line because the properties' cash flow barely covers debt service.
'A Good Track Record'

"We have a handful of tough deals that we made at the top of the market," Rob Speyer said. But the company has "a good track record we're proud to stand behind," said Mr. Speyer, who spoke from São Paolo, Brazil, where he was visiting the firm's projects and scouting for new opportunities.

The Tishman partnership that bought the CarrAmerica portfolio has been in talks with its lenders, led by Lehman Brothers Holdings Inc., since late 2008 about modifying the credit agreement, according to S&P. But so far, nothing has happened and, until now, the talks have been kept quiet. "We have confidence in the long-term value of the properties," Rob Speyer said.

S&P warned even if Tishman wins new covenants, its ability to refinance the loans in 2011 "will likely require additional capital investment or a recapitalization."

The woes of Tishman and other landlords is stoking fears among regulators and bankers that turmoil in commercial real estate may derail the hoped-for economic recovery. There are more commercial-mortgage-backed securities outstanding than credit-card debt, student loans and car loans combined and many of those loans are going bad rapidly. About $128 billion in office buildings, hotels, stores and other commercial property are in default, foreclosure or bankruptcy, according to Real Capital Analytics.

Tishman took advantage of easy credit and didn't put much of its own cash into its troubled deals. In the $2.8 billion CarrAmerica transaction, Tishman recruited about a dozen partners, including Lehman, to put equity into the highly leveraged deal, according to people familiar with the matter. The seller was Blackstone Group, which sold the portfolio for an enormous profit just months after buying it from CarrAmerica Realty Corp.

he Speyers point out that their firm has made more than 20% annual returns on investments since its inception three decades ago, and currently has more than $2 billion of liquidity to invest in new deals. In the phone interview that included Rob Speyer, Jerry Speyer noted that his son also was responsible for selling more than $12 billion of property at the top of the market.
Tishman's Distraction

But the foundering deals remain a blow to Tishman Speyer's reputation, which was honed over the decades as the company's reach extended from New York to the rest of the world. The company became known for solid returns and smart deal-making. But now the troubled deals have become a distraction as company officials wrestle with creditors to restructure debt.

Another headache is resulting from the 2007 leveraged buyout of Archstone, in which Tishman and Lehman each put up $250 million in equity for control of the company. Lehman also cobbled together a $20 billion financing package, with $7 billion sold to Fannie Mae and $2 billion to Freddie Mac. Lehman, Barclays PLC and Bank of America Corp. together provided a $4.6 billion bridge-equity loan to get the deal done.

Archstone has struggled to sell buildings to pay down debt. The properties are current on their debt service but needed a capital infusion earlier this year. Lehman received the bankruptcy court approval to put $230 million more into Archstone, hoping its big city luxury apartments regain their value on the other end of the recession.

An even bigger problem is the Peter Cooper Village and Stuyvesant Town transaction. A venture of Tishman and BlackRock Realty Advisors financed its $5.4 billion purchase of the complex with $4.4 billion in debt. As the weakening New York economy hinders the venture's ability to boost the rental income of the complex, the project is running the risk of defaulting.

The venture is burning through its interest reserve used to pay the difference between the property's cash flow and debt service. It is expected to be depleted by early next year. In the past, the partnership has said it would put up more capital as needed.

Jerry Speyer said that any potential loss in his company's troubled deals represent only a "small part" of the profits it has reaped over the years. "If you don't take any risks, you don't have any rewards," he said.