The Canuck pries himself away from bearish polar matters long enough to remind us that the second wave of the latest tulip bubble is hitting the shores. As usual, it’s eroding the bejesus out of Prole Island and piling the fertile soil up nice and high over on the Caymans. Here’s a Joanna Slater article from the Feb. 8 “Globe and Mail”:
It’s a deal so big – and so bad – that one observer mused it was the
city’s worst property transaction since a group of Native Americans
were swindled out of the island of Manhattan by Dutch settlers.Struck at the height of the real-estate boom, the $5.4-billion (U.S.)
purchase of two storied New York apartment complexes finally crashed
to earth in late January when the owner walked away, turning over the
keys to a group of creditors.The deal’s failure is a harbinger of trouble ahead in the U.S.
commercial real estate market, where prices have tumbled but many say
the woes have just begun.Much like overstretched homeowners, developers borrowed heavily to buy
office buildings, shopping malls, hotels, and apartments across the
U.S.Now the bill is coming due. The number of such property loans going
bad is set to climb for at least another year, experts say, provoking
a new round of bank failures that will weigh on the economy for years
after that.Sifting through the debris of the deal for the two New York apartment
complexes – Stuyvesant Town and Peter Cooper Village – shows how
complicated the process can be. Whoever controls the property will
face scores of investors manoeuvring to recover billions in losses,
not to mention thousands of worried tenants.“We are a little bit in uncharted territory here,” says Sam Chandan,
chief economist at Real Capital Analytics, a property research firm in
New York. “It’s the scale, the scope, the number of participants to
the transaction.”The most likely candidate to take over: CWCapital, an arm of the
Caisse de dépôt et placement du Québec, which is representing a group
of lenders with the top claim to the property.CWCapital is one of a handful of firms with a specialty that’s in
increasingly high demand: attempting to recover value from soured
loans.Compared to the housing market, commercial real estate runs on a
slower metabolism, meaning it takes longer for the business to react
to changes in the broader economy. The sector “was the last to get
into the recession and will be the last to come out,” says Aaron
Bryson, an analyst at Barclays Capital in New York.The bad news is that once the slow-burning fuse is lit, it will take
years to be extinguished. After the last recession ended in 2001,
office vacancy rates didn’t top out for another two years, and an
actual improvement in the market didn’t happen until early 2006, Mr.
Chandan said.The proportion of commercial real estate mortgages going bad won’t
peak until next year, predicts Thomas Fink, senior managing director
of Trepp, a mortgage data firm. Sorting out the detritus of imploded
deals – either by restructuring or liquidating them – will continue
into 2015, he says.Shouldering much of the losses will be scores of regional and local
banks across the U.S., which are far more vulnerable to the sector
than their larger counterparts. These banks stand to lose up to
$300-billion on commercial real estate in the coming years, a recent
Deutsche Bank report estimated. Hundreds of them are likely to fail as
a direct consequence of such investments, it predicted.While such failures likely won’t rattle the financial system as a
whole, they will echo through their communities, making an impact on
local businesses and homeowners who depend on these banks for access
to credit.The U.S. Federal Reserve was so worried at the prospect of trouble
ahead that in January it launched a nationwide training program for
all of its bank examiners on how to assess banks that are struggling
with bad commercial real-estate loans.Sorting out the mess will take years – as shown by the tangled path
ahead for New York’s Stuyvesant Town and Peter Cooper Village.Built in the 1940s by insurer Metlife to house veterans returning from
the Second World War, the two complexes occupy a swath of lower
Manhattan bordering the East River and encompass over 11,000
apartments.In the ensuing decades, their brick facades and winding paths became
an oasis for middle-class New Yorkers, who flocked to the
rent-regulated apartments as market rents in the city soared.Enter Tishman Speyer, one of New York’s most high-profile developers,
and BlackRock, one of the world’s largest asset managers. Persuaded
that they would be able to spruce up the apartments and jack up rents,
the pair paid $5.4-billion for the complexes in 2006, the most
expensive price ever for a residential property in the U.S. They also
raised an additional $900-million to cover future expenses like
interest payments and renovations.All but $1.9-billion of the funds were borrowed, mainly in the form of
commercial mortgages, which were then repackaged and sold in
interest-bearing slices to hundreds of investors around the world.None of the buyers’ exuberant expectations materialized. Rents and
property values in New York fell as the recession deepened. The plan
to raise rents ran into fierce opposition from tenants and later from
the State of New York’s top court, which ruled last year that Tishman
had improperly increased rents on 4,400 apartments, opening the door
to more than $200-million in rebates.By last month, the complexes were worth an estimated $1.9-billion,
about a third of the purchase price. That means the investors who put
up the original equity – among them two California pension funds and
the Church of England – have seen their investments wiped out. Those
who provided money for the mortgages, depending on the level of risk,
will also take heavy, and in some cases total, losses. The owners
defaulted on their loans, and at the end of January, said they would
hand over the property to creditors rather than file for bankruptcy.Now CWCapital, which represents the holders of the senior mortgages,
must find a new manager to run the properties. Then it will need to
figure out how much the property is worth and how much tenants are
owed. And all the while, different types of creditors will be
jockeying to protect their interests ahead of a potential
renegotiation of the loans or a sale to a buyer. It’s a process that
could take years.CWCapital is owned by Otéra Capital, one of the Caisse’s real estate
arms. The Caisse suffered massive losses on its real-estate portfolio
last year, which pushed it to write down $5.7-billion (Canadian) in
investments in the first half of 2009.An Otéra spokesperson declined to comment on events in the U.S.
CWCapital also wouldn’t comment. The firm holds some of the repackaged
slices of the property’s mortgages, according to a person familiar
with the transaction, which is why they were tapped to represent
lenders.In exchange for those services, CWCapital will likely earn fees
according to the industry standard, which include 0.25 per cent
annually of the total loan value.The size of the mess at Stuyvesant Town prompted Willy Staley, writing
on the website of Next American City, a quarterly magazine, to compare
it to the purchase of the island of Manhattan by Dutchman Peter Minuit
in 1626 (which, according to legend, took place in exchange for 60
guilders worth of trinkets).Separated by 380 years, the two transactions “are completely unrelated,” he wrote, “aside from the fact that they may go down in
history together as the worst real estate deals to ever happen, ever.”
The short version, in case you missed the first 500 acts of this play: The assclowns who paid the gazillion dollars for the swampland will not only avoid losing any of their own money, they’ll become famous and do the same thing again and again and again. You will pay for it in higher interest rates and taxes.