http://www.nytimes.com/2009/02/07/business/07properties.html?_r=1&hp
Sam Zellâs Empire, Underwater in a Big Way
By CHARLES V. BAGLI
Published: February 6, 2009
The Worldwide Plaza building in New York, left, was part of Macklowe Properties. Center and right, the Chicago Title and Trust building and the Chicago Mercantile building are part of Tishman Speyer.
It was, for a brief shining moment, the real estate deal of the century.
In 2007, Sam Zell, the billionaire Chicago investor, sold a portfolio of 573 properties he had assembled over three decades, Equity Office Properties Trust, to the Blackstone Group for $39 billion. It was the largest private equity deal in history, but Blackstone did not stop there: it immediately flipped hundreds of the buildings for $27 billion.
Today, the wreckage of those purchases is strewn across the country, from Southern California to Austin, Tex., to Chicago to New York. Many of the 16 companies that bought Equity Office buildings are now stuck with punishing debt, properties whose values are plummeting and millions of feet of office space they cannot fill.
Few deals better exemplify the excesses of the commercial real estate boom than the dismemberment of the Equity Office empire, and fewer still better underscore their bitter consequences.
Buyers purchased buildings at what, in retrospect, were vastly inflated prices. Lenders provided lavish, even excessive, financing based on unrealistic expectations of rising rents. And now that values are tumbling, vacancy rates are rising and credit has become impossibly tight, many on both sides are struggling against default, foreclosure or bankruptcy.
The impact could ripple beyond the companies that bought Equity Office buildings and the investment banks that financed them. If the owners cannot make their loan payments, it could create a financial crisis for the pension funds, hedge funds and insurance companies that hold securities based on Equity Office mortgages.
The list of Equity Office buyers reads like a Whoâs Who in American real estate. In Stamford, Conn., RFR Properties, a partnership headed by Michael Fuchs and Aby Rosen, who owns Manhattan landmarks like Lever House and the Seagram Building, spent $850 million to buy seven Equity Office buildings that analysts say are now worth less than their mortgages.
In Los Angeles, the founder of Maguire Properties, one of the largest commercial landlords in Southern California, was forced to step down last year as the company struggled with crushing debt from buying 24 Equity Office buildings.
And in New York, the real estate mogul Harry B. Macklowe lost seven Equity Office towers he bought from Blackstone, along with much of his empire, after he was unable to refinance the $7 billion in short-term, high-interest debt he used to buy them.
âThose who bought from Blackstone have not fared well at all,â said Michael Knott, a real estate analyst at Green Street Advisors. âBlackstone was a huge winner at the time, although the value of what they still hold has fallen probably 20 percent.â
Mr. Zell, who became chairman and chief executive of the Tribune Company after selling Equity Office, amassed his supersize real estate portfolio over many years. But the deal to sell the properties to Blackstone, the big private equity firm run by Stephen A. Schwarzman, occurred with lightning speed and what one executive who participated in the transaction called, âshort-form due diligence.â
Blackstoneâs purchase of Equity Office in February 2007 began a series of other record-breaking deals in Stamford; San Francisco; Portland, Ore.; Orange County, Calif., and Chicago, as Blackstone quickly sold about 70 percent of the portfolio to 16 other companies. The company still owns 105 Equity Office properties.
âThese were aggressive acquisitions under the best of circumstances,â said Paul E. Adornato, a senior real estate analyst at BMO Capital Markets.
The buyers found lenders only too willing to finance as much as 90 percent or more of the purchase price, even as profit margins shrank, on a bet that rents and values would continue to rise. The investment banks, including Morgan Stanley, Wachovia, Goldman Sachs, Bear Stearns and Lehman Brothers, in turn collected their fees as they packaged the loans as securities and sold them to investors.
âIt certainly defined a period of time where debt was readily available in large quantities at low prices,â said Robert S. Underhill, who heads the capital transaction group at Shorenstein Properties L.L.C.
Not everyone who bought Equity Office buildings is in dire shape.
After looking at Blackstoneâs Equity Office portfolio in many cities, Shorenstein settled on Portland, where it bought 46 buildings for $1.1 billion. It was the one place where price, initial returns and potential for growth made the most sense, Mr. Underhill said.
But elsewhere, problems with Equity Office properties have spread like a virus, weakening and even paralyzing major real estate developers.
In Stamford, the crisis on Wall Street and the consolidation of financial services has weakened the market, undermining the RFR Propertiesâ effort to raise rents at its seven Equity Office buildings by 15 percent. The purchase price of $850 million, roughly $515 a square foot, was close to a record for Stamford.
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Sam Zellâs Empire, Underwater in a Big Way
By CHARLES V. BAGLI
Published: February 6, 2009
The Worldwide Plaza building in New York, left, was part of Macklowe Properties. Center and right, the Chicago Title and Trust building and the Chicago Mercantile building are part of Tishman Speyer.
It was, for a brief shining moment, the real estate deal of the century.
In 2007, Sam Zell, the billionaire Chicago investor, sold a portfolio of 573 properties he had assembled over three decades, Equity Office Properties Trust, to the Blackstone Group for $39 billion. It was the largest private equity deal in history, but Blackstone did not stop there: it immediately flipped hundreds of the buildings for $27 billion.
Today, the wreckage of those purchases is strewn across the country, from Southern California to Austin, Tex., to Chicago to New York. Many of the 16 companies that bought Equity Office buildings are now stuck with punishing debt, properties whose values are plummeting and millions of feet of office space they cannot fill.
Few deals better exemplify the excesses of the commercial real estate boom than the dismemberment of the Equity Office empire, and fewer still better underscore their bitter consequences.
Buyers purchased buildings at what, in retrospect, were vastly inflated prices. Lenders provided lavish, even excessive, financing based on unrealistic expectations of rising rents. And now that values are tumbling, vacancy rates are rising and credit has become impossibly tight, many on both sides are struggling against default, foreclosure or bankruptcy.
The impact could ripple beyond the companies that bought Equity Office buildings and the investment banks that financed them. If the owners cannot make their loan payments, it could create a financial crisis for the pension funds, hedge funds and insurance companies that hold securities based on Equity Office mortgages.
The list of Equity Office buyers reads like a Whoâs Who in American real estate. In Stamford, Conn., RFR Properties, a partnership headed by Michael Fuchs and Aby Rosen, who owns Manhattan landmarks like Lever House and the Seagram Building, spent $850 million to buy seven Equity Office buildings that analysts say are now worth less than their mortgages.
In Los Angeles, the founder of Maguire Properties, one of the largest commercial landlords in Southern California, was forced to step down last year as the company struggled with crushing debt from buying 24 Equity Office buildings.
And in New York, the real estate mogul Harry B. Macklowe lost seven Equity Office towers he bought from Blackstone, along with much of his empire, after he was unable to refinance the $7 billion in short-term, high-interest debt he used to buy them.
âThose who bought from Blackstone have not fared well at all,â said Michael Knott, a real estate analyst at Green Street Advisors. âBlackstone was a huge winner at the time, although the value of what they still hold has fallen probably 20 percent.â
Mr. Zell, who became chairman and chief executive of the Tribune Company after selling Equity Office, amassed his supersize real estate portfolio over many years. But the deal to sell the properties to Blackstone, the big private equity firm run by Stephen A. Schwarzman, occurred with lightning speed and what one executive who participated in the transaction called, âshort-form due diligence.â
Blackstoneâs purchase of Equity Office in February 2007 began a series of other record-breaking deals in Stamford; San Francisco; Portland, Ore.; Orange County, Calif., and Chicago, as Blackstone quickly sold about 70 percent of the portfolio to 16 other companies. The company still owns 105 Equity Office properties.
âThese were aggressive acquisitions under the best of circumstances,â said Paul E. Adornato, a senior real estate analyst at BMO Capital Markets.
The buyers found lenders only too willing to finance as much as 90 percent or more of the purchase price, even as profit margins shrank, on a bet that rents and values would continue to rise. The investment banks, including Morgan Stanley, Wachovia, Goldman Sachs, Bear Stearns and Lehman Brothers, in turn collected their fees as they packaged the loans as securities and sold them to investors.
âIt certainly defined a period of time where debt was readily available in large quantities at low prices,â said Robert S. Underhill, who heads the capital transaction group at Shorenstein Properties L.L.C.
Not everyone who bought Equity Office buildings is in dire shape.
After looking at Blackstoneâs Equity Office portfolio in many cities, Shorenstein settled on Portland, where it bought 46 buildings for $1.1 billion. It was the one place where price, initial returns and potential for growth made the most sense, Mr. Underhill said.
But elsewhere, problems with Equity Office properties have spread like a virus, weakening and even paralyzing major real estate developers.
In Stamford, the crisis on Wall Street and the consolidation of financial services has weakened the market, undermining the RFR Propertiesâ effort to raise rents at its seven Equity Office buildings by 15 percent. The purchase price of $850 million, roughly $515 a square foot, was close to a record for Stamford.
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