Commercial real estate death watch

August 10, 2009

It’s no wonder that the Federal Reserve has a watchful eye on commercial real estate. Lending hasn’t come back, prices are plummeting and those that poured funds into the sector during real estate boom are getting killed by high vacancy rates and falling rents.

Maguire Properties is one such company. The Wall Street Journal reports the debt-laden REIT is handing over seven buildings to its creditors along with the $1.06 billion of debt that comes along with them. But rather than restructure the debt, the creditors may try to offload them into an extremely soft market, suggesting they’d rather take their lumps now rather than wait for a snapback in the market that may well be years away.

That’s not good news for office building prices since such sales could pressure prices even further.

Chief Executive Nelson Rising, who was brought in by the company’s board last year to succeed Mr. Maguire, said in an interview that restructuring the debt on six of the buildings, located in Orange County and Los Angeles, is one possibility. But he said the most likely scenario is that the mortgage holders will take over the properties and try to sell them. Maguire already has a deal to turn over one of the buildings, Park Place One, in Irvine, Calif., to LBA Realty, a real-estate company that acquired the debt on the property at a discount in the spring. A telephone call placed to LBA’s principal wasn’t returned.

Among the office buildings that Maguire will turn over to creditors is Stadium Towers Plaza.

The debt on the other six properties was packaged by Wall Street firms and sold as commercial mortgage backed securities, or CMBS, to dozens of institutional investors. Mr. Rising said that Maguire would work closely with the servicers of that debt to transfer control of the buildings. The seven buildings, with 4.2 million square feet, make up about 20% of Maguire’s portfolio.

The CMBS market, though on firmer footing thanks to government programs to revitalize it, still hasn’t seen any new issuance since the market closed down last year. That makes refinancing debt difficult if not impossible since banks and insurance companies – the other big lenders – have all but abandoned the sector.

As the FOMC meets this week, CMBS and the broader commercial real estate market is sure to be on policymakers’ minds as they consider what stimulative programs should die a natural death and which ones need more time to work their magic. While the Treasury purchases are likely to among the first significant program to wind down, the dismal state of commercial real estate suggests that its lending facilities for CMBS will be with us for a long time to come.


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