RealEstateFlux

A rash of commercial foreclosure news has hit the markets, including a Deutsche Bank loan on The Drake property in New York, a Gramercy Capital loan on Cupertino Square in Silicon Valley, and the Riverton House project in Harlem. Yet these are examples of mismanagement and overleverage at the height of the market rather than a significant new trend in commercial foreclosure rates. According to Bloomberg and REIS data, the US market with the highest commercial foreclosure rate in 2Q 2008 was Chicago at 0.34% - hardly a significant trend.

Take for instance the Cupertino Square mall in Silicon Valley - mall owners took out a $195 million construction loan from Gramercy Capital two years ago at the peak of the cycle. Now that markets and mall operations have contracted, and presumably because the project couldn’t obtain further financing, Gramercy is looking to seize assets and make its investors whole. This is poor strategy, not a sign that responsible retail operators will start defaulting at any significant rate.

Another sterling example of an overextension is the foreclosure by Deutsche Bank on the $510 million loan collateralized by The Drake in New York City, part of the remnants of the Macklowe portfolio. If Macklowe’s strategy at the time of the Drake acquisition wasn’t predicated upon capital appreciation, with the market already at a high water mark, this would not be a story today. But otherwise, it is a spectacular flameout that is read into for signs of a growing trend in commercial foreclosures. Yet the reality is that commercial foreclosures are still at very low rates.

Bentley Forbes is at a crossroads. The Los Angeles based owner and operator has amassed a $3 billion portfolio over the last 15 years, but the time has come for expansion. To date, all of their growth has been self funded via their own operating revenues. Now the firm’s stated objective is to grow their portfolio to $12 billion over the next five years, and their plan is to to tap outside capital through strategic joint ventures.

The question is which strategy would achieve the greatest net returns on a risk adjusted basis in their five year investment window?

In a press release on August 14, the firm named the following possible strategies:

• Global Expansion (Enter International markets)
• New Acquisitions (Class A Office, Luxury Resort & Hotel, Single Tenant Corporate)
• New Development/Redevelopment (Property Expansion, Renovation, New Projects)

Real Estate Flux proposes the following specific strategies:

• Value-add hotel repositioning
• Mezzanine debt placements and fund creation
• Distressed debt purchases and fund creation
• Value-add multifamily repositioning

See the prediction market here.

The prevailing wisdom in the hospitality sector is to pull back in a time of economic downturn. Yet an article in The Wall Street Journal last week detailed the bullish sentiments of Horst Schulze, former Ritz Carlton President, now CEO of the West Paces Hotel Group who will be opening seven ultra luxury hotel globally in the next ten months. Apparently Lowe Enterprises agrees with his due diligence. Lowe has just announced a $33 million preferred equity placement from its Lowe Structured Investment Fund into the SLS Hotel in Beverly Hills. Sam Nazarian’s SBE group is renovating this former Le Meridian property.

CPN| Gail Kalinoski | August 11, 2008

“This property is a solid fit with the loan criteria established for our fund,” said Philip Peters, LEI executive vice president and portfolio manager for the fund, which offers mezzanine debt and preferred equity for commercial, residential and hospitality properties in the United States and Canada. “It has a prominent position in one of the country’s top hotel markets and a respected local ownership group.” Peters added in a LEI news release that SBE, a privately-held company founded and run by CEO Sam Nazarian, is “renovating an existing hotel in an irreplaceable location, thus significantly increasing the value of what was an underperforming property.”

Given the slowing US economy, weakening corporate earnings, rising fuel costs and reductions in air travel,  there is a high probability that hotel RevPar growth will slow down. Yet the ultra luxury hotel segment seems to be defying this assumption.

The Wall Street Journal | William Boston | August 6, 2008

“The pipeline lags behind the economic cycle,” says Patrick Ford, president of Lodging Econometrics. “There will be a peak in hotel openings in 2008 and 2009, but from 2010 through 2012 there will be a slowdown.”

“Hoteliers are anxious about 2009,” says Scott Berman, advisory partner at PricewaterhouseCoopers specializing in hospitality and leisure. “Commercial cities like New York, Paris and London are still performing quite well. But we can’t ignore the comments from the airlines. If they really do cut back like they are saying — as much as 20% in some markets — that will have an impact.”

“For the past 30 years, few national real estate developers have had as much market impact as Ian Bruce Eichner” reads Mr. Eichner’s biography on the Cosmopolitan Resort & Casino website. Now that Deutsche Bank is foreclosing on the resort and casino after Mr.Eichner’s $760 million default in January, it is clear Deutsche was looking for a different “market impact”. The $3.9 billion project is still on schedule for a late 2009 opening after Deutsche was able to come to terms with general contractor Perini Building Co to stay on the job. Deutsche is said to be evaluating potential operators as well as seeking new investors. Earlier this year Deutsche chose to sell at a loss the Macklowe office portfolio it had foreclosed on. Apparently selling into the Las Vegas downturn would entail too significant of a loss.

Bloomberg | Jonathan Keehner and Jason Kelly | August 7, 2008

Sagging commercial real estate prices, weighed down by record subprime defaults, forced banks to hold projects until prices rise or sell at a loss. The Frankfurt-based bank would oversee an 8.5-acre development with two high-rise towers, three wedding chapels, a sandy beach overlooking the Las Vegas Strip and a deck featuring “European-style bathing.”

The New York Times | Mark Landler | August 1, 2008

“Deutsche Bank’s risk aversion, and its unspectacular profits, used to be cited as evidence the stodgy bank would never compete in the top tier of global investment banks. Now Mr. Ackermann [CEO] looks like a banker for his times.”

“But the bank has taken over a $3.9 billion casino project in Las Vegas that it had originally financed for a developer, Ian Bruce Eichner. Mr. Ackermann said he was confident Deutsche Bank could line up investors.”

The New York Times | David W. Dunlap | April 25, 1993

Book Review: “HIGH RISE How 1,000 Men and Women Worked Around the Clock for Five Years and Lost $200 Million Building a Skyscraper. The “High Rise” of Jerry Adler’s narrative is 1540 Broadway, on Times Square, which sprouted during a building boom and limped to completion during a recession. Led by the developer Ian Bruce Eichner, hundreds of people spent hundreds of millions of dollars to produce an empty box 44 stories tall. (It has since been acquired by the Bertelsmann media conglomerate and renamed the Bertelsmann Building.)”

Ominous clouds encircle “Encore”, Steve Wynn’s latest mega resort on the Las Vegas strip. The $2.3 billion project with 2,034 rooms is scheduled to open later this year. Meanwhile, gaming revenue is down 15% in Nevada, and Boyd’s Gaming Corp. has just suspended construction of their $4.8 billion “Echelon” project. Boyd’s CEO Keith Smith is quoted in the Wall Street Journal as saying “The decision to delay is not a reflection of the merits of this project but rather of the economic challenges facing the entire industry.” How well is Steve Wynn positioned to ride out a soft opening as the economy gets itself back in gear?

The Wall Street Journal | Tamara Audi | August 2, 2008

The problem surrounds a critical part of the project in which Boyd and Morgans Hotel Group have partnered on two boutique hotels. Boyd said that Morgans couldn’t secure $950 million in financing for the hotels. Separately, Boyd has already committed to funding $3.3 billion of the project through a credit facility, which has been drawn down by about $500 million so far. Morgans said it will evaluate future proposals to revive the joint venture.

Las Vegas Sun | Sam Skolnik | August 3, 2008

The jobless rate in Nevada climbed to 6.4 percent in June, the highest rate in more than 14 years. Airlines are questioning the need for a third terminal at McCarran International Airport, unsure whether they can sell enough seats as fares go up and flights are cut back. Tourist spending is down. Nevada’s gaming revenue is down 15 percent, the worst in more than a decade. New-home construction remains stalled, and the median price of a home is about $270,000, down from $329,000 two years ago. Nevada leads the country in the rate of home foreclosures. We’re no longer holding the pace of 5,000 new residents a month. The school district is reexamining how many schools to build.

Bottom line: We’re in the midst of the worst economic downturn in several decades.

The New York Times | Julie Creswell | August 3, 2008

“Unlike Sands and MGM, investors aren’t really that concerned about Wynn’s balance sheet,” says Bill Lerner, an equity analyst at Deutsche Bank. Wynn Resorts doesn’t need to raise money to finish current projects in Las Vegas or China, he says, adding that the company is “underleveraged, relatively speaking.” Unlike MGM and Sands, Wynn Resorts doesn’t have “big development pipelines” in the works, he says.

Chicago Real Estate Daily | Alby Gallun | July 23, 2008

An Irish condominium developer wants to build two 25-story towers with hotel rooms and residences at the southwest corner of Harrison and Wells streets in the South Loop. Limerick, Ireland-based Chieftain Group plans 200 hotel rooms, 200 apartments and 250 condos on the 2-acre parcel, part of a long-vacant 8-acre tract known as Franklin Point, says Sean O’Sullivan, Chieftain’s chief operations officer.

“We’re using the time well to get through the planning process so when the market does turn we’re ready to break some dirt,” he says. “The market will turn in 2009.”

Source: The Wall Street Journal

The odds, as they say, are against him. Mr. Nazarian has never run a casino, and he is entering the business in a downturn that’s fleecing existing casinos and snuffing out new ones reports The Wall Street Journal. But Mr. Nazarian says his hotel and casino will have an edge over competitors. It will serve a market that he says has been priced out of Vegas: the young party crowd that’s dropped a fortune at his Los Angeles clubs and restaurants. “There is an alienation of the high-energy, youthful crowd,” says Mr. Nazarian as he strides through the Sahara’s lobby, where he has already spent about $2 million in furnishings and décor.

Source: The New York Times

InBev, the Belgian-Brazilian beer giant, has made it relatively clear that it plans to sell parts of Anheuser-Busch to help pay for its $52 billion takeover of the King of Beers reports The New York Times. To fund what is the largest all-cash deal on record, the company has secured $45 billion in debt financing from 10 banks. That includes $7 billion in bridge financing “for divestitures of noncore assets from both companies,” the merger announcement said. Speculation has focused on Anheuser-Busch’s nonbeer assets, such as its real estate.

Source: PR Newswire

Apollo Real Estate Advisors has closed a value add fund to strategically focus on existing, income-producing U.S. properties reports PR Newswire. Apollo Value Enhancement Fund VII will continue Apollo’s value-added strategy of investing in real estate assets primarily in major markets in the United States. The fund will seek to create a diversified portfolio across major property types, according to Steven Wolf, Apollo partner who oversees the firm’s Value Enhancement Funds.

“We are very gratified with the response from our investors to the new Value Enhancement Fund,” Wolf said. “We continue to see compelling opportunities where our team can apply its deep real estate expertise to add value in the current environment.”

Fund investments include 500 1st Street N.W. in Washington, D.C., a 129,000-square foot office building. The nine-story building, which also has two underground parking levels, is located on 1st Street N.W. and E Street N.W., just two blocks from Union Station and four blocks from the U.S. Capitol. Apollo plans approximately $7 million in building improvements in conjunction with the lease renewal of the current tenant, the U.S. General Services Administration (GSA) on behalf of the Department of Justice, which currently has a ten-year lease, Wolf said.

The fund also purchased the Hilton Dallas Lincoln Centre, a 500-room, 20-story glass curtained hotel tower is located prominently within Lincoln Centre, a premier Class A complex in North Dallas encompassing 1.6 million square feet. The hotel is situated at the intersection of the North Dallas Tollway and the Lyndon B. Johnson Freeway, directly across from the Galleria complex. Wolf said Apollo plans approximately $30 million in hotel renovations.