So far in this bust the pain has been concentrated in single family homes and their associated mortgages and mortgage backed securities. But that’s not the only kind of debt that got out of hand during the boom. There were similar debt orgies in commercial real estate and private equity. Two recent Barron’s features articles by Andrew Bary suggest the pain still to come in those two areas.
In this week’s “Out of Control” (subscription required), Bary details the problems plaguing a number of debt heavy Manhattan apartment deals.
For example, the biggest one, Stuyvesant Town and Peter Cooper Village, a giant complex with 56 buildings and more than 11,000 apartments that was bought by Tishman Speyer and Blackrock Realty Advisors for $5.4 billion in 2006, has annual interest costs of $300 million but rental income – rent minus expenses – of only $108 million in 2007. The deal was financed by a $3 billion first mortgage and $1.4 billion in junior debt. The $3 billion first mortgage was chopped into pieces and securitized to investors by Wall Street investment banks.
A lot of commercial mortgage backed securities are held on the books of Wall Street investment banks: Investment Bank Commercial Real Estate Holdings Chart. Pretty soon the writedowns on these things could start mounting if the deals Bary talks about are representative of the overall market. I first wrote about this back in March: “Commercial Real Estate Is Next”, Top Gun FP, March 3, 2008.
Last week, Bary reviewed 13 LBOs (“Look Out Below!” (subscription required)) that are straining amid a weakening economy and massive debt loads such as Archstone, Clear Channel, Harrah’s, Hilton, Realogy, Tribune and Univision. There will likely be some blow ups here before the credit crunch runs its course.
Just because the writedowns and blow ups in residential real estate might be winding down doesn’t mean the credit crunch is over. We’re likely to see some pretty spectacular implosions in commercial real estate and private equity going forward. Get your popcorn ready – because it’s going to be a show.