Since the start of the Commercial Real Estate crash of 2009, Connecticut Commercial Real Estate owners have been living in the eye of the real estate storm. Landlords in CT read the news as REIT stocks tumbled on the heels of hedge fund implosions. They worried as the end of 2008 and the credit crisis hit retail property owners with rising vacancies and rent renegotiations. But, they did not feel the earth shift under their feet the way REITs world wide and commercial property owners in Florida, Texas, Vegas and the Inland Empire east of Los Angeles hit by the subprime crash, over building, and the crash of our retail economy did.

Now the storm is gaining speed and no one is safe in the eye. The market in Connecticut is shifting, assets and equity are for sale.

In Plainville, Connecticut Commons, 556,000 square feet of retail space is on the block. It is part of a 52 property portfolio being sold by Macquarie DDR Trust throughout 20 states. The property had been valued by the ownership for $91 million. But that counts Linens and Things on the balance sheet. An open air big box center, one wonders what the vacancy rate will be in six months or two years. How many people will buy fishing rods at Dick's Sporting Goods for opening day of trout season this year?

A year from now, the sale of the John Hancock Tower will be hailed as the shot heard round the commercial real estate world. The building sold at auction in 60 seconds for $660.6 million.

In 2006, its sale price was $1.3 billion.

In 2009, a roomful of investors stood with their arms at their sides while a single bidder raised his hand. The Tarantino twist in the story? This was not a sixty second sale.

Normandy Real Estate Partners bought enough of the debt through second and third mortgage leans on the tower to force its troubled owners into foreclosure on the first mortgage. More twists: the roomful of prospects were only there to see what would happen and how low the price would go.

The unknown subplot realized after multiple calculations? Not only was the sale price a fifty percent discount off the purchase price of two years ago, Normandy bought the building for an even lower price in real dollars. They bought the Boston landmark at a cost of money far below that which is available to buyers with today's underwriting and increasing vacancy. The real cost of the tower is closer to $400 million.

Investors watched. Fire sales won't sweep the market traditionally, savvy investors are going to look for similar over leveraged properties. In fact they already are, in Colorado and Southeastern states where money ran like water for the past seven years.

In Connecticut those properties will be harder to find, vacancy rates being an underwriting issue since the early 90's when the state last sunk. But 1031 money flowed freely from New York City for several years, so there will be distressed properties to cherry pick.

Though Prologis, Kimco Realty and Simon Property have successfully sold equity, REITs are over leveraged and stocks are falling. Mergers and acquisitions are on the horizon. Of the 130 public REITs, 30% are trading at below $5 a share. REITs have stakes in CT. Through mergers and acquisitions, properties will continue to be dropped from portfolios and will be opportunities for CT investors who have been waiting for prices to fall.

While there isn't much land left in our state, existing properties will be prime for redevelopment, green development, transit oriented development and available at lower prices than we've seen in ten years if they are sold off as under-performing REIT assets.

Toxic, the catch phrase of self help books for a decade is the commercial real estate catch phrase of the next several quarters. Keep an eye out for toxic assets and opportunity.


April 14, 2009