Bailing Out For A Buck

Further evidence of the crash in office property values comes from news that the Canadian Pension Plan Investment Board (CPPIB) with $436.9 billion in capital sold its 29% stake in Manhattan’s 360 Park Avenue South for $1 to its partner Boston Properties Inc., which agreed to assume CPPIC’s share of the property’s debt. It was only in the third quarter of 2022, CPPIB committed $83.6 million as part of a tri-party venture with Boston Properties and GIC to acquire the 20-story office building. The pension fund spent $71 million on the project but bailed for a buck (+debt) when required to pony up another $46 million. 

CPPIB wasn’t done selling. The investment board sold a 45% stake in Santa Monica Business Park for $38 million, a discount of 75% to what CPPIB paid in 2018. Again, the pension plan sold when more money was required to improve the campus. 

CPPIB took only a 20% haircut on the sale of two office towers in Vancouver.  

 “To get even better returns in your office investment you’re going to have to modernize, you’re going to have to put a lot more money into that office,” said Matt Hershey, a partner at real estate capital advisory firm Hodes Weill & Associates. “Sometimes it’s better to just take your losses and reinvest in something that’s going to perform much better.”

“Things can’t just sit forever,” Josh Zegen, a co-founder of Madison Realty Capital told Bloomberg. “If you have some trades, and values are coming down, that’ll force some of the mark-to-value conversations.”

Scott Rechler, chief executive officer of New York landlord RXR described the market in five stages of grief Elisabeth Kübler-Ross outlined in her 1969 book On Death and Dying: Denial, Bargaining, Depression, Anger, Acceptance, 

“In 2024, we’re at that fifth stage of grief,” Rechler said. “People are now in acceptance.”

“When people hand back keys, that’s not the end of it — the equity is wiped but the debt is also massively impaired,” said Dan Zwirn, CEO of asset manager Arena Investors, which invests in real estate debt. “You’re talking about getting close to land value. In certain cases people are going to start demolishing things.”

Real estate developers may be at acceptance. We’ll see if bankers are.

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