Fools-A-Plenty

The greater fool in the Stuyvesant Town-Peter Cooper debacle? Time will tell. Meanwhile, sales figures may or may not bloom in spring, and the banks are still feeling the pain of CRE debt.

January 26, 2009
By Dees Stribling, Contributing Editor

When a major property owner throws in the towel on a major property in a major market, do its lenders count as the greater fools? In classic greater-fool theory, a fool in a rising market can buy a property that might otherwise be a less-than-wise investment because a greater fool can be counted on to come along and buy it for still a higher price.

That wasn’t quite the idea when Tishman Speyer and partner Black Rock Inc. plunked down $5.4 billion during the height of the bubble for Stuyvesant Town/ Peter Cooper Village with plans to convert many of its 11,000 apartments to market-rate units. In that case, maybe the partnership was counting on tenants to be the greater fools by being willing to pay much higher rents. Since then there’s been a real estate collapse, recession and angry tenants winning the fight against deregulation.

Instead of defaulting, the partnership has turned in the keys to lenders — Fannie Mae, Freddie Mac, CalPERS and, interestingly, the Church of England — who are getting a property valued at about $2 billion that’s encumbered by about $4.4 billion in debt. Someone’s a greater fool in that mess, but it’s hard to know who.

Home Sale Droop

Winter has always been a sluggish time for home sales, but homebuilders and brokers once anticipated expanding sales as spring livened up Americans’ appetite for buying and selling houses. This year the industry is worried that things might be different, and perhaps with good reason.

According to the National Association of Realtors, existing home sales between November and December 2009 dropped 16.7 percent to a seasonally adjusted annualized rate of 5.45 million units–the largest drop ever recorded by the NAR in more than 40 years of measuring the market. The comparable annualized rate in November was 6.54 million. Most observers chalk up the drop to the fact that the federal tax credit for new homebuyers is due to sunset soon, an entirely reasonable assumption.

NAR’s chief economist Lawrence Yun, who’s become adroit at putting the best possible face on a bad housing market after years of practice, did likewise with regard to the latest numbers: “By early summer the overall market should benefit from more balanced inventory, and sales are on track to rise again in 2010,” he noted in a statement.

There were actually some positive housing numbers toward the end of January. For all of 2009, the United States saw about 5.16 million existing home sales, compared with 4.91 million in 2008. Moreover, the median price for existing houses inched upward to $178,300 in December 2009, up 1.5 percent from December 2008.

CRE Debt Blues

Will 2010 finally be the year of reckoning for the masses of bad commercial real estate loans that have thus far been kicked down the road? Federal Deposit Insurance Corp. chairwoman Sheila Bair noted recently in a speech to Commercial Mortgage Securities Association that the road is only so long, and the big banks will feel the pain too.

“CRE noncurrent and charge-off rates are higher at banks with over $1billion in assets than at community banks,” she said. “Industry analysts expect CMBS delinquency rates to continue climbing.”

The rest of the economy might not quite be ready for a larger wave of CRE delinquencies and defaults this year, but the commercial real estate industry probably is, at least psychologically. “We all know the industry’s debt problems represent a long-term situation,” Stan Ross, chairman of the board for the Lusk Center for Real Estate, told CPE. “Real estate has been in a survival mode for quite a while, and that isn’t going to change in 2010.”

Did President Obama’s rhetoric on banks actually scare Wall Street on Friday, or was it just a down day? In any case, the Dow Jones Industrial Average dropped about 213 points, or 2 percent, while the S&P 500 was down 1.9 percent and the Nasdaq lost 1.1 percent. The day’s trading wiped out all of 2010’s modest gains for the markets.