Wednesday, April 1, 2009

What John Hancock Tower Sale Implies For CRE

Zero Hedge's feelings about commercial real estate are no secret. Yesterday's sale of the John Hancock Tower to Normandy was an interesting market test, with media reports claiming it implied either nothing much or only good things about CRE and CMBS recoveries. A contrarian (and realistic) analysis on the transaction out of Morgan Stanely implies that based on this deal, not all is good in CRE land. (hat tip to reader David).


In a foreclosure auction today, the John Hancock Tower - a marquee building in Boston - traded at $660MM to Normandy Real Estate Partners. That same property was appraised for $1.3BN in 2006 and traded for $935MM in 2003. This is VERY negative for commercial real estate. At face, it looks like even top quality assets are down 50% from their peak, but that forgets the value of the financing that Normandy now gets to assume. There will still be a $640.5MM mortgage on the property at a rate of 5.6%.

What is the value of being able to get a 97% LTV loan at 5.6% these days? Let's say you can get a 60% LTV mortgage ($400MM) at 8%, and the other $240MM in mezz financing (which has no chance of getting done in this market) could hypothetically get done at 15%. That combination produces a weighted average financing cost of almost 11%. A 5.6% mortgage at 11% yield is about a 70 $px, which means the value of assuming the existing financing on the Hancock Tower is close to $190MM. The real clearing level for the top commercial property in Boston was only $470MM - down 65% from 2006 levels and down 50% from 2003 levels. If we assume 2008 NOI numbers are still accurate, this would be a 9.5% cap rate adjusted for the financing. Without adjusting for the value of financing, the purchase price of $660MM looks like a 6.7% cap rate and $383/sqft - rich, relative to 1540 Broadway (NY office vs Boston office) recently clearing at ~$400/sqft.

**The main takeaway: property values are down A LOT more than people think, especially when considering the implied value of financing. Caveat Emptor.**

On the brightside for holders of GG9, the #1 loan now has a better sponsor with a lighter debt load. Unfortunately, not every CMBS loan had a 50% LTV to 2006/2007 levels like John Hancock Tower...Severities will be much higher for the majority of 75+% LTV CMBS loans. Sphere: Related Content
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Anonymous said...

fix this dmn RSS tyler! please

Anonymous said...

so what are the CME REITS to short? i know GS said FRT, DRE, CUZ, KRG and REG. but which one is best? anybody have any comments?

maybe no borrow is avail so i should use puts?

Anonymous said...

That took a bit to follow, but I think I got it. Normandy Real Estate Partners seems to have pulled off one of those NO MONEY DOWN late night infomercials that you don't see anymore.

Normandy basically told the Bank, we'll bid $660 Million, if you give us a 5.6% no money down loan, because that's what the rents support.

So bid of $660M @ 5.6% equals $470M % 11%.


Lookout said...

No, what this means is that in pure economic terms the seller PAID the buyer to take over the property ( by the amount if the value of the cheap financing). Truly a CRE Short Sale!

Anonymous said...

Normandy had bought a bunch of the mezz debt, so they basically just paid $20 million over the mortgage amount and agreed to cure any existing defaults. So their equity is $20 mm plus whatever they paid for the mezz.

russell1200 said...

Hancock building is infamous in architectural circles for having windows that would come lose and come crashing down on the sidewalk.

Took an absolute ton of money to fix. Or at least a lot in pre-bailout terms. The story implies that I am going to have a deflationary single digit paycheck, but the bailout numbers imply that I may experience a six git paycheck eventually. Just have to wait and see which way it will go.

Anonymous said...

Anonymous @ April 1, 2009 11:56 AM is the only person who really gets it.