Yale USA Investment Corp. is giving Boston’s 451 D St., known as the Fargo Building, back to its German lender, Munich-based HypoVereinsbank, in order to avoid foreclosure proceedings.
Increasingly, commercial real estate is looking foreclosure.
Underscored by reports that Boston’s 451 D St. is being turned back to the German lender that financed the struggling office building’s $72 million purchase four years ago, conditions appear ripe for a jump in asset failures in both the suburban and downtown sectors. While stressing that the trend will not resemble the commercial foreclosure crisis of the early 1990s, industry observers predict that many building owners will not survive the long road to recovery.
“I do think others will fall victim,” offered investment banker George J. Fantini Jr., adding he was unaware but “not surprised” that Yale USA Investment Corp. has opted to turn the keys to 451 D St. back to the lender, Munich-based HypoVereinsbank. Fantini declined to discuss that building’s particular woes, but said he does believe the market’s weaknesses are finally catching up to landlords throughout the region.
“The passage of time is causing some properties to run out of gas,” said Fantini, particularly as above-market rents achieved in the previous leasing cycle disappear through attrition. “That’s really what seems to be setting off some of these problems for properties that otherwise have been able to stay above water,” said Fantini, adding that rising interest rates would drown even more troubled assets should they begin to emerge during the year.
Should a loan enter into default, it could result in foreclosure, but in many instances, the owners are pre-empting that eventuality by surrendering their buildings outright, as is the apparent case with 451 D St. Officials at both Yale USA and HypoVereinsbank did not return phone calls by press deadline, but sources insisted that the 480,000-square-foot property is being turned over to the Munich-based lender, as initially reported last week on Banker & Tradesman’s Web site.
“It’s going down any day,” insisted one Boston broker familiar with the negotiations, who described the talks as “amicable.”
“I don’t think there’s any animosity at all,” said the broker, who requested anonymity. The source also said that CB Richard Ellis/Whittier Partners is being replaced as building agents, with that assignment now turned over to Meredith & Grew/Oncor. Ronald Perry, head of Meredith & Grew’s Downtown Leasing Group, confirmed that his firm has been selected to lease and manage 451 D St., but declined to offer specific details. CB/Whittier President Andrew Hoar did not return a phone call by press deadline to discuss that situation.
Bursting Bubble
A division of a Canadian-based real estate group, Yale USA faced a range of obstacles in trying to lease up 451 D St., known commonly as the Fargo Building. Not only did the investment group acquire the building at the top of the investment cycle, paying $72 million in April 2000, the office and high-tech sectors eroded rapidly soon after the deal was consummated.
Whereas the surrounding Seaport District had become a popular safety valve during Boston’s booming economy, it is now seen as a fringe office location offering little in either amenities or significant rent relief from the glut of opportunities found closer to the downtown core. Observers claim that Yale also was hurt by its strategy to chase the telecommunications industry to dominate 451 D St.’s tenant base. That particular market segment was especially hurt by the bursting technology bubble that occurred shortly after Yale purchased the Fargo Building.
“It has just never performed for them,” one broker familiar with the property said last week. “They had to do whatever they could,” the broker added in assessing Yale’s decision to give up on the asset.
HypoVereinsbank provided $67.3 million to Yale to acquire 451 D St. It is unclear what the lender will do once the property is returned, with some predicting that HypoVereinsbank also will eschew the lease-up process and pursue a buyer. Perhaps the only clear winner at present is Meredith & Grew, whose selection helps bolster the notion that a full-service local firm can attract an international client such as HypoVereinsbank.
“It’s a nice assignment for them,” agreed a competitor. Other Meredith & Grew divisions could benefit should HypoVereinsbank opt for divestment, particularly M&G’s extensive Investment Sales Group. Sources said M&G’s Michael Edward will oversee leasing for the building, while Dennis Callahan will handle the management aspect.
Yale Properties is the second Boston office building to fail in recent months, with a pension fund returning Lincoln Plaza back to Washington Mutual Bank last autumn. Located near South Station, that property has since been sold to the Cresset Group, which will convert one of two buildings there into a residential use. The pace of such failures has been more acute in the suburbs, with such entities as Berkeley Investments, Congress Group Ventures and Archon Atlantic all turning back office properties in recent months.
For his part, Fantini said he is encouraged that the number of foreclosures has remained relatively in check even though market conditions are approaching the levels of despair seen in the early 1990s. Others agreed, although it does appear the number of incidents is on the increase. “It has taken longer for borrowers to throw in the towel, but we’re definitely seeing it more and more,” said one real estate finance specialist. “It’s just a sign of the times.”
