Another phase in US property rout

Bloomberg

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Commercial property loans in default or foreclosure grew in the first quarter as the U.S. recession cut occupancies and the credit crisis stymied refinancing.

Delinquent loans increased by 43 percent in the first three month of this year to $65.9 billion, according to data from New York-based research firm Real Capital Analytics. That’s up from $46 billion at the end of 2008.

A total of 3,678 U.S. properties are now listed as in distress by Real Capital. Commercial real estate values have fallen at least 30 percent since their 2007 peak and may decline another 11 percent this year, increasing the number of properties that may be repossessed by banks, Deutsche Bank’s real estate unit said in a March 25 report.

"We haven’t yet seen the worst of the effects of the recession on the commercial markets," said Stuart Saft, a partner at the law firm of Dewey & Leboeuf in New York, who specializes in real estate. "That’s still to come."

Boston’s John Hancock Tower, New England’s tallest skyscraper, was sold at auction March 31 to Normandy Real Estate Partners and Five Mile Capital Partners for $661 million, about half of the purchase price of just three years ago.

Broadway Partners, founded by Scott Lawlor, paid $1.3 billion for the property in 2006 and defaulted on its loan. The building was part of Broadway’s $3.3 billion purchase of 10 buildings from Boston-based Beacon Capital Partners in December 2006.

The Los Angeles metropolitan area has about $7.5 billion distressed properties, a 168 percent jump from December. Las Vegas had a 54 percent increase, to $6.1 billion, Real Capital said.

Metropolitan areas with more than $1 billion of commercial properties in distress more than doubled to 11 from five. Philadelphia, Chicago, San Francisco, Austin and Houston, Texas, and Detroit joined New York, Las Vegas, Miami, Phoenix and Los Angeles.

Manhattan distressed commercial real estate has risen by 36 percent this year to $4.2 billion, according to Real Capital.

The Nobu Hotel & Residences in lower Manhattan is among properties on Real Capital’s troubled asset list. Real Capital called it a "challenged development" because Nobu has lost some construction funding. The planned 62-story tower, the Nobu sushi restaurant chain’s first U.S. hotel, was being built by investor Kent Swig and is near the New York Stock Exchange.

Lehman’s claims

Swig, 48, is delinquent on $49 million of construction loans, according to a complaint filed by his lender Lehman Brothers Holdings. The project has been halted.

Swig, who has developed properties worth about $3 billion, including two office buildings on Wall Street, is also fighting default proceedings on a suspended Lehman-financed condominium conversion project at 25 Broad St. in Manhattan. Lehman claims in a separate lawsuit that Swig and his partners owe $273.7 million of unpaid principal on that project, plus interest and fees.

Developer Sheldon Solow’s planned East River housing and office development near the United Nations is also identified as delinquent on Real Capital’s list.

Solow owes $85.7 million in construction loans and letters of credit on the project, Citigroup said in a Dec. 16 default claim in state court.

In an answer to the complaint filed Feb. 20, Solow said the bank rebuffed his offer to provide additional collateral. Instead, Citigroup sold the initial collateral for millions below fair market value, he said.

Solow is planning to build six waterfront apartment towers and a 1.4 million square foot office tower on 9.7 acres, according to the New York Department of City Planning.

Real Capital defines distressed properties as those in which a lender has taken steps to foreclose or declare a borrower in default, as well as properties that have been returned to the bank, or in cases where landlords were given a loan extension or the debt was restructured.

Foreclosures will "continue to grow, probably for at least another year or so," Peter Culliney, Real Capital research director, said in an interview. The increase in distressed properties may spur more purchases, he said.

"Our problem now is people don’t know what the baseline price is, and they don’t know whether they can get any kind of financing," he said. "So unless you’re strong enough that you can do a cash deal, everybody’s really sitting on their hands."