Back in the height of the bubble, just three short years ago, this plot of land, glass and concrete represented the biggest real estate deal in US history:
Yesterday morning, we filed it in our bulging “signs of the times” folder… Witness one of the worst housing “flips” of our time:
The busted owners of NYC’s Stuyvesant Town and Peter Cooper Village returned the city-within-a-city to their creditors yesterday.
Tishman Speyer Properties and BlackRock Realty bought the 110-building complex in Manhattan (over 11,000 apartments) for $5.4 billion in 2006. The plan was to nail up crown moldings here and there, replace some carpets and do a little painting…and then jack up rents, ride the endless wave of rising home prices and, ultimately, sell the complex to some larger fool for a couple billion more.
You know how this ends. Most ratings firms estimate the 80-acre lot is now worth about $2 billion – just a hair off the $4.4 billion in mortgages and loans the group tapped in 2006. Now, like millions of other underwater homeowners in the US, Tishman Speyer had to choose yesterday whether to hand back the proverbial keys or file for bankruptcy.
“Real estate investment trusts are still priced at bubble valuations,” Dan Amoss tells us. “Valuations that bear little resemblance to economic reality.
“Since the Fed was so adept at easing the pain of its favored constituents – the bubble-blowing class – 2009 was the year that the REIT sector bought time by raising new debt and equity in the secondary market. Investment bankers worked overtime to promote these deals to their institutional clients. Most of these institutional investors follow outdated, static sector allocation models that ignore bubbles.
“Robert W. Baird’s real estate research team estimates that REITs raised $17 billion in equity from secondary market offerings in 2009. For those REITs that raised equity, shares outstanding rose by an average of 22%. This larger shareholder base means that the claim that each REIT share has on future profits is permanently diluted.
“But that wasn’t enough capital for the most highly levered REITs, which remain at risk of bankruptcy in a double-dip economy. These levered REITs still need much more capital to delever, and investors may soon balk at the terms offered on recapitalizations. So 2010 may be the year that REIT promoters run out of greater fools to buy secondary stock offerings at bubble valuations. Baird estimates that another $26 billion in new equity needs to be raised over the next few years. This $26 billion in new capital – if it even exists and is looking to participate in REIT secondary offerings anywhere near current prices – would translate into further dilution.”