Here in New York City, big numbers always dominate the local news. While it’s easy to talk about how Mike Bloomberg spent at least $90 million to squeak out a win in his race for a third term as mayor yesterday, these days the big number mentioned is $5.4 billion.
That’s the amount that local developer Tishman Speyer and investment powerhouse Blackrock spent to buy the huge Stuyvesant Town development in 2006, at the top of the real estate market. In turn, Tishman and and Blackrock turned around and packaged the promise of future rent flows from the complex as $4.4 billion in loans and commercial mortgage-backed securities (CMBS).
Since then, the Stuy Town project has been plagued by missteps. Promises to keep rates steady at rent-controlled levels — promises the joint venture had to make to get the city to agree to sell the property in 2006 — were almost immediately broken, with tenants being overcharged to the tune of $200 million. But with the downturn in the real estate market, defaults and late payments have risen at Stuy Town, endangering the new owners’ ability to meet their debt payments on the $3 billion in outstanding CMBS issued. People who claim to have looked at the finances claim Stuy Town only has enough liquidity to last through February. Even the eponymous Rob Speyer, co-chief executive along with his father, concedes the CMBS is going to require a restructuring.
In response, the Fitch ratings agency downgraded the CMBS bonds on Friday, and now says a default on the loans is likely.
While Stuy Town is unique in its size, it is not unique in its predicament. Real estate analysis firm Reis says the complex is indicative of the larger commercial real estate market:
About $26.64 billion of CMBS loans outstanding were 60 days or more past due last quarter, according to Reis. The default and delinquency rate rose to 4.52 percent from 0.8 percent a year earlier and 3 percent in the second quarter. Defaults may top 6 percent by year-end, the firm said.
This coming spike in defaults shows that even with the recent positive news — including last quarter’s 3.5% GDP growth — we’re not out of the woods yet. Most of that growth came from Recovery Act funds, including the “cash for clunkers” program and the increase in the first-time home-buyer’s credit. While this kind stimulus spending can provide an economic shot in the arm, it is not the basis for sustainable growth.
The collapse of the residential mortgage market (led by sub-prime mortgages losing value) was a big driver of the economic collapse of last year. The downturn that sends us into the second leg of a “W shaped recession” could be driven in part by the collapse of the commercial real estate market. Stuyvesant Town’s economic difficulties are a $5 billion canary telling us that things may get worse before they get better.