“Polatnick Properties has planted its flag in Jackson Square with the…$7 million acquisition of 731 Sansome St. Polatnick paid about $185 a square foot for the 38,000-square-foot office building, less than half of what the historic 1911 structure would have traded for in 2007. The purchase was all cash.”
∙ Jackson Square building sells for $7M [San Francisco Business Times]
∙ 731 Sansome [polatnickproperties.com]
∙ A Half-Price Sale For Class A Commercial Real Estate In San Francisco [SocketSite]
The fall of CRE has been predicted for some time for many reasons, mainly that CRE was in a bubble as well and we built too much of it. Also, CRE performance often lags Residential by about 5 quarters (if I recall correctly off the top of my head).
Finally Bernanke is talking about the coming CRE implosion. only about 2 years too late. it’s astonishing how our govt/business leaders can be constantly “surprised” by this stuff. It’s been obvious for years.
The key to this story is that the buyer used CASH. it’s because lending in CRE is terrible right now. (for good reason, we have too much commercial real estate).
these 50% off deals will become common unless the govt can come up with a way to get the securitization model working again, a difficult task indeed.
It was more politically feasible with the Residential RE market since there already was Fannie/Freddie/FHA/Ginnie etc and also political will (“keep people in their homes!”)
harder to set up a “Bizzy Mae” to help businesses and to help re-jump start the commercial RE securitization market. I’m sure they’ll try of course.
Luckily the CRE implosion will be smaller than the second wave of residential implosion. Unfortunately, these commercial real estate loans are concentrated in the regional and smaller banks, which will cause difficulty when we try to bail them all out.
[Editor’s Note: Bernanke Says Commercial Property May Pose Risk for Economy.]
But I don’t think they will get their bailout. The regional banks had the misfortune of not reaching too-big-to-fail status and so they’ll go the FDIC takeover route. You and I pay either way — just by different means and degrees.
I worked on a lot of litigation in the late ’90s involving real SF CRE bargains picked up during the mid-90s downturn. The current downturn is dwarfing that one, and I think the half-off (or more) sales here will be quite routine.
Why would the Fed bail out the smaller, regional banks? The whole point of the Fed is to protect the large money center banks. When the small banks implode, the big ones will just pick up their good assets for pennies on the dollar, and the taxpayers will take the crap assets through FDIC (or some other way they’ll dream up).
LMRiM and Trip: I don’t think we disagree.
I doubt that it matters overall if the Regional banks get bailed out versus being absorbed into the super-duper-too-big-to-fail national banks.
the problem is that the assets that they hold are crap. Rolling them into the biggest bank isn’t enough as the losses will affect the bigger bank as well (like what we’re seeing with BofA trying to digest Countrywide).
FDIC is nearly bankrupt already without trying to eat some of the bigger Regionals.
in other words: I agree with you that the Regionals likely won’t get a bailout (as I said above in my post). However, they’re going to be hard to digest all the same.
perhaps they’ll start “good bank-bad banking” the Regionals… that’s still going to hurt when the losses come into the bad bank.
The FDIC doesn’t receive any tax dollars; instead it’s funded by the premiums paid by banks and thrifts for insurance coverage on deposits.
@nyc26
mostly right, but if it gets real bad, well they do have a nice lifeline from the Treasury – which of course, is the same thing as the taxpayer 🙂
http://online.wsj.com/article/SB124276506015836059.html
The moment that the FDIC fails to pay out every American will head to their bank to withdraw all of their money. This will cause the instantaneous collapse of the US banking system. Therefore the FDIC will never be allowed to fail while the government has paper, ink and printing presses.
Since we are going the zombification route, I think it’s safe to use my patented lazy google indicator for Noe Valley again (until something blows up of course). Have fun!
Although since mish gave his talk at google, who knows, lol 🙂
http://www.youtube.com/watch?v=1YKc0UolTqE
—-
Some amusing new-normal fetishism:
Here’s a guy really putting his shoulder into it, but I’m guessing he’s not willing to pay 2005 prices in Noe, or anywhere else
http://men.style.com/details/features/full?id=content_9817
Note he doesn’t even live near a muni stop, unlike the “poorgeoisie”!
http://men.style.com/details/features/landing?id=content_9418
[“and no”, I don’t generally read GQ magazine 🙂 ]
—-
In other news, looks like someone at the SEC is going rogue:
http://bit.ly/cEkwK
Gotta start small, I guess 🙂
Hmm – the bearish/doom and gloom dominant sentiment of comments here at Socketsite is almost as boring as the bullish/cheerleading “real estate just goes up” comments of a couple of years ago. Yes, commercial real estate had a bubble too, and yes, there is going to be some hell to pay for quite a while, but is this sale indicative of the sky falling? Not quite. This is a Class C office building with limited natural light to the spaces. These buildings typically sold in the $200 to $300 per square foot range for most of the last decade with maybe a few sales in the $350 per square foot range during the short peak of the market for commercial space. This not Class A investment grade office property. So they just sold a 38,000 square foot Class C building with 25,000 square feet of vacancy for $185 per square foot. Again, like the 250 Montgomery sale – the biggest discounts are going to be for buildings that need to be re-tenanted (like this one) while the office market is still shedding space (aka negative absorption). So once again, this property is a good value indicator for vacant office buildings that need to be re-tenanted, but is not a very good indicator for office buildings with a steady tenant roster. And that 50% off figure – that’s a big wild a**ed guess which seems to be overstating the decline as a 2/3 vacant office building of this size is going to require a discount to a normal property in a good or bad market.
The FDIC doesn’t receive any tax dollars; instead it’s funded by the premiums paid by banks and thrifts for insurance coverage on deposits.
This comment is funny on so many levels. Thanks for the laugh this morning!
nyc26 wrote:
> The FDIC doesn’t receive any tax dollars; instead it’s funded by the
> premiums paid by banks and thrifts for insurance coverage on
> deposits.
Then LMRiM wrote:
> This comment is funny on so many levels.
> Thanks for the laugh this morning!
Another funny one is “Firefighters pay for 100% of their pensions while working”. I just heard this from a fraternity brother who plans to “retire” at age 50 in a few years and get a pension of over $200K a year (and then find a senior position with another fire department at $200K+ a year so he can “retire” with a second full pension at 65).
The firefighters will have to ramp up the PR campaign and hope that most people can’t estimate what size pension you would need to pay out $250K a year for over 30 years.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/07/21/BUN618S39O.DTL
Miles:
your post was filled with excellent factual information.
however, I don’t think any of us was arguing that Class A CRE property in SF is at 50% off. Obviously prime fully-rented Class A property in pristine condition is going to sell for more (and at less discount) than vacant Class C property, in the same way that a pristine Noe Valley SFH is going to go for more than a Fixer Upper in Bernal.
Perhaps you would know this as it would help to
what is the
-% of SF CRE that is Class A and non-vacant
-% of SF CRE that is Class A with significant vacancy
-% of SF CRE that is Class C and non-vacant
-% of SF CRE that is Class C with significant vacancy.
-% of SF CRE that is Class B (vacant and non-vacant)
of course, part of the problem is that this data is changing as new office space is just coming on line in the Bay Area, and there has been negative absorption of CRE due to job losses, companies retrenching, etc.
@ ex SF-er
Actually, I *would* argue that the value decline for good-quality Class A buildings approaches 50%.
Take a look at 250 Montgomery, which sold for $175 to $180 per s.f., depending on what numbers you believe. Down from about $400 in 12/2006. That building is about half vacant.
731 Sansome sold for $185 per s.f. and is inferior to 250 Montgomery in most respects (location, construction quality, light/air, occupancy).
A closer comp for 731 Montgomery is the sale of 755 Montgomery in July of last year. That building traded at $325 per s.f. at nearly 90% occupancy. The delta is minus 43%, before making any adjustment for the difference in leasing costs. Add-back another 10% to 15% of the $185 sale price to bring it to 90% occupancy and the purchaser’s all-in cost is about $205-$210 per square foot (with an adjusted decline of about 35% or 36% in comparison with 755 Sansome).
A few more data points will show us whether the price paid for 731 Sansome was cheap or not.
@ Ex SF-er
The answers to most of your questions can be found here:
http://www.grubb-ellis.com/PDF/metro_off_mkttrnd/SanFrancisco1Q09.pdf
The linked data is specific to San Francisco (not the Bay Area).
Vacancies up during the quarter. Asking rents down 31% from the peak for Class A and down 21% for Class B. No completions in several quarters. Lots of negative absorption.
OK so 731 Sansome sold for 185 psf. Class C rents have declined to 27.46 psf. And takers are few. Suppose you dropped your asking rent to 25 psf and were able to fill up the building. That’s a gross return of 13.5%. On the other hand, with newly purchased rental housing you’d be lucky to gross 3%. What am I missing?
@ Salarywoman
Once you take into consideration lease-up costs, vacancy and collection loss of 5% to 10%, operating expenses of $12-$14 per s.f., you’d be looking at a cash-on-cash return of less than 5%, which is less than investors typically require for an investment in a building with a lot of leasing risk.
You can drop your rents to $25, but you may be chasing the market down. There just aren’t that many tenants looking for space, as the negative absorption shows.
Also, the purchasers paid $7 million cash. Not too many banks willing to lend on a mostly vacant office building.
If it was as easy and riskless as you suggest, then everyone would be doing it.
SausalitoRes has got it pretty right on the money, though I think you can operate a building for quite a bit less than $12-$14 psf per year in a recession, especially with a lower Prop 13 tax basis on a $185 psf purchase. The over-riding thing now in the commercial market is there really is only money available, both on the equity and debt side, for vulture purposes. There’s a huge overhang of short term financing that needs to be covered in the next 5 years and credit has contracted to a fraction of what it was when these loans were written, so even institutional owners with Class A buildings and tenants are having trouble getting loans. Adding to that misery was the common usage of “mezzanine” 2nd/loans above the standard 70% loan to value ratio for commercial real estate in the last decade, so now you have a building written with a 80-90% loan and the value has dropped 20-50% and the lenders are now only going to write a 65-70% loan on these when the note comes due. Not pretty at all.
731 sansome is just the tip of iceberg.
Major, high rise ,Class A office structures cannot sell right now for 50% of acquisition recent cost. For example 150 California and One Market. Remember zell – blackstone – morgan stanley ? There deals are not coming to market because off market discussions with potential buyers are off by say $ 100 – $ 200 psf between bid and ask.
555 Mission street – best new building in city – just did a lease for a lower floor at $35 FS rent and $80 TI. work your way thru the figures and that is around $5 psf NET. not 5%. $5.
so office market probabaly has a long way to go on pricing down. and then a long way to go on rent coming back up. Buyers who buy low price per pound now, thinking that is “value”, might be unhappy 5 years out, when they realize how slow employment and rent recovery really take.
SausalitoRes:
thanks for the information and your input. I don’t track local SF CRE as much as I do national statistics, so your linked information is of great help. Your input moreso.