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Is the Largest U.S. Real Estate Deal on the Verge of Default?

September 10th, 2009



The New York Times had a scary headline in today’s issue: the prospect of Tishman Speyer and BlackRock defaulting on $4.4 billion in loans. I took the news somewhat personally, as I was once a resident of one of the properties involved; Stuyvesant Town. This massive complex, and its sister set of apartment buildings, Peter Cooper Village, were constructed after World War II by Metropolitan Life, right in the heart of Manhattan, to provide affordable rental homes for returning veterans.

Under New York City’s bizarre rental laws, massive market distortion reigned. Apartment rents in Manhattan were by far the highest  in the U.S., but many apartments, including much of these two complexes, were rent stabilized, meaning they were leased out at far below the market rent. However, various avenues allowed rent stabilized apartments to eventually be leased out at full market rent. That was the logic behind the purchase from Metropolitan Life of Stuyvesant Town and Peter Cooper Village for a record $5.4 billion by Tishman Speyer and BlackRock. This deal was done when the market was at its peak in Manhattan, so the investment seemed like a no brainer. It was a no brainer, but for the wrong reason.

A leading credit agency now values these two iconic Manhattan residential properties at a mere $2.13 billion, representing a 60% decline in valuation. Rents have receded 25% from their peak, and Tishman Speyer and BlackRock are confronted with a $4.4 billion obligation, with the sands of time slipping away before they are faced with default.

If these two properties are stricken with default, the repercussions in New York City will be massive, but not confined  to that one city. This may be only the beginning of a trend afflicting large scale apartment rental complexes throughout the United States.

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