Prudential Insurance’s real estate arm will soon seize control of Bay Colony Corporate Center in Waltham. When it does, it will mark the second time in a year that the 1 million-square-foot trophy asset has changed hands – interesting, considering the office park hasn’t been on the market since 2007.
The continued ownership turnover at Bay Colony highlights one of the more unique aspects of the current round of commercial real estate distress: Most of the opportunities aren’t in the actual real estate.
Finding Alternate Means
When the commercial real estate markets collapsed at the end of 2008, opportunistic investors stockpiled cash and waited for a flood of bank-owned properties to hit the market. But that flood has yet to appear, as most banks have preferred loan modifications and extensions over messy – and costly – foreclosure proceedings.
So in the absence of REO fire sales, opportunistic investors are looking to scoop up the debt on over-leveraged commercial assets as an alternative means to an end.
Last year, Normandy Real Estate Partners swiped Boston’s John Hancock Tower from Broadway Partners through a mezzanine foreclosure. Eastern Real Estate, which is now in the process of losing Bay Colony to Prudential, displaced the office park’s former owners by grabbing pieces of the park’s debt.
The timing of those two transactions made them outliers. Debt-buying opportunities are just now beginning to come to market in decent volume. According to Douglas Linde, president of Boston Properties, that’s because lenders are realizing that the sheer numbers of investors hunting for distressed assets is bringing loan prices to a point where lenders – banks, commercial mortgage-backed securities servicers, and investors in mezzanine debt – are now comfortable shopping piles of debt to investors.
For instance, TIAA-CREF is currently shopping $49 million in senior mezzanine debt on Tishman Speyer’s One Federal St. tower in Boston. And brokers expect Capmark, the bankrupt commercial real estate lender, to soon begin marketing its mezzanine debt on Tishman’s other Hub office tower, 125 High St.
“If a lender can sell their debt for 80 cents on the dollar and the borrower is effectively asking them to take 75 cents on the dollar [in a workout], they’ll sell,” Linde told Banker & Tradesman. “Now, they’re all out there assessing the market, saying, ‘We’re probably better off handing this problem off to somebody else because we can get taken out at a number that’s satisfactory to us.’ We are seeing more and more of that.”
Boston Properties is aggressively shopping the market for debt stakes that the company can turn into controlling equity interests in properties. It recently bid on a piece of debt tied to a development site it’s trying to acquire.
“We are not naïve about where the opportunities are going to come from, and if we think the value is being held in the capital stack on the debt side, we’ll try to work a deal that way,” Linde said.
“We’re seeing it more and more,” Michael Fascitelli, CEO of Vornado Realty Trust, told Banker & Tradesman. “Number one, pricing has come up. And these assets need attention, so they can’t be in limbo for an extended period of time. I think we’ll see more.”
Opportunistic Investing
At Bay Colony, industry sources said, Eastern has fallen victim to the same forces that buried the property’s former owner, Broadway Partners: Falling property values and mounting vacancies. Banker & Tradesman reported in March that the office park’s cash reserves were dwindling, and a default was imminent. Prudential is now expected to either sell its debt to a new operator outright, or to form a joint venture with a local development partner.
Either way, an opportunistic investor will gain control of the property by entering its debt stack and assuming responsibility for its $144 million securitized mortgage, which matures in 2012.
Sam Zell, the commercial real estate “grave dancer” who made a fortune buying distressed office properties in the early 1990s, said at a recent Urban Land Institute forum that there are no distressed real estate opportunities in the market “unless there’s volume, and right now there is no volume.”
“Everybody talks about 30 percent to 40 percent declines in value, but we only have three or four examples to prove that,” said Zell, the chairman of Equity Residential, and former head of Equity Office Properties. “Instead of banks being inundated with REO’s, they’re taking them on one at a time, and by virtue of taking them one at a time, at the same time, there’s this vast amount of capital out there. It’s cushioning the change in pricing.”
“I don’t see any great equity investment opportunities on the real estate side in the U.S.,” Zell added. “All our activities are in buying distressed debt in one form or another.”
