Global Economic Crisis

The global economic and financial crisis was unleashed when the American real estate bubble, especially in connection with sub-prime housing mortgages, burst. Among several factors that facilitated this disaster, one of the prime ones was the loose  monetary policies of Ben Bernanke, chairman of the U.S. Federal Reserve. While speculation continues on the probability that the Senate will/will not reconfirm Bernanke for a second term as Fed chairman, the same level of monetary indiscipline is still in practice at the Federal Reserve, complemented by the easy fiscal polices of the Obama administration as well as Timothy Geithner`s Treasury Department. Meanwhile, signs that the real estate market in the USA remains very weak continue.

A report on existing home sales has just been released, indicating that in December there was a decline of 16.7%. Sales rose in the previous three months, but that was only due to significant tax credits, courtesy of the  taxpayers of tomorrow, who will be burdened with staggering levels of national debt. Using borrowed money to fund short-term gimmicks cannot provide a cure for long-term structural imbalances in the U.S. economy.

Another jolt points further at commercial real estate’s accelerating descent in valuations and rising rates of foreclosure. In 2006, Tishman Speyer, a major CRE investment firm located in New York City, put together a deal with a consortium, purchasing Manhattan’s giant Stuyvesant Town and Peter Cooper Village apartment complexes from Metropolitan Life for $5.4 billion, the largest real estate deal at the time of its consummation. Over the weekend, Tishman Speyer went into default on the property, handing it over to its creditors. The number of investment interests that have lost money on this deal ranges far and wide, not only in the United States but across the globe. Among the losers is the Church of England, which has just seen £40million go down the proverbial  rat hole. In October, the Fitch ratings agency valued Tishman Speyer’s original $5.4 billion property as having a current value of a mere  $1.8 billion. This represents a loss of  two thirds in valuation in less than four years, a metaphor I should say for the entire U.S. residential and now commercial real estate casino marketplace.

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.