Like many homeowners who owe more than their properties are worth, the heavy hitters behind the most expensive real estate deal in U.S. history are giving up the two massive apartment complexes they bought during the nation's housing boom.
The 110 buildings and 11,000 apartments that make up Manhattan's Stuyvesant Town and Peter Cooper Village will be turned over to creditors who financed the $5.4 billion deal in 2006, the ownership team said Monday. Fitch Ratings estimates the property now is worth $1.8 billion.
The team, led by Tishman Speyer Properties and BlackRock Realty, was hurt by the real estate market collapse and couldn't make a $16 million loan payment due earlier this month. Partnership spokesman Bud Perrone said the decision to transfer control to lenders was the only viable alternative to bankruptcy.
A number of large-scale defaults have been happening around the country as owners grapple with the aftermath of the housing-bubble collapse, a fragile economy and constrained credit markets. Many property owners have been unable to refinance burdensome debt, and in some cases, commercial property landlords facing mounting payments have had to file for bankruptcy protection or walk away from their holdings.
It has been a "perfect storm of lending and credit markets," said Steve Kuritz, a senior vice president at the credit ratings agency Realpoint LLC. "You had aggressive lending, aggressive underwriting and then you had property values plummet. It was a combination of all of that."
In April, mall operator General Growth Properties filed for Chapter 11 protection after racking up some $27 billion in debt. In June, hotel operators Extended Stay Hotels LLC and Red Roof Inn Inc. each followed suit.
And in August, Los Angeles-based Maguire Properties Inc. said it would stop making payments on more than $1 billion in loans for seven office buildings in Southern California and try to sell them or turn them over to lenders.
The bankruptcies and defaults were part of the commercial real estate market's worst year in decades, and analysts expect the woes to deepen before a turnaround takes hold. Vacancies have soared as unemployment worsened and businesses and consumers reined in spending.
Nearly $31 billion worth of commercial apartment properties were in default, foreclosure or bankruptcy as of last month, according to Real Capital Analytics. And things are expected to get worse before they get better.
Apartment vacancies rose to more than 8 percent last year and are projected to dip slightly by the end of this year, according to Marcus & Millichap Real Estate Investment Services.
"I felt there was huge question mark on the side of my building" when I heard the news, said Susan Steinberg, the vice president of the Stuy-Town tenants association told NBC New York.
In New York, the decision to turn Stuyvesant Town and Peter Cooper Village over to creditors brings an end to a deal that had been a topic of much consternation among residents and politicians who wanted to protect what had long been a bastion of affordable housing.
Monday's announcement renewed those concerns. City Public Advocate Bill de Blasio warned in a statement that "changes in Stuyvesant Town's ownership must not be used as an excuse to hike rents and skimp on apartment services."
At the time of the sale in 2006, many real estate analysts had also voiced doubts about the record purchase price, but the partnership believed it had a winning strategy: It would aggressively convert thousands of rent-regulated apartments occupied by middle-class families into luxury units that would fetch top dollar.
The tactic failed as the city's housing market cooled.
Apartment conversions happened much slower than expected, many of the roughly 25,000 tenants fought back and a state court ruled that about $200 million in the partnership's new rent increases was improper.
It hasn't been determined when the ownership transfer of the sister properties will take place and who specifically the new owners will be, said Perrone, the partnership spokesman. In a statement Monday, Fitch Ratings said it believes the transfer of control of the property could be a lengthy process.
Tishman Speyer, whose other properties include Rockefeller Center and the Chrysler Building, said it wouldn't consider a long-term management contract to continue operating the apartment complexes if it didn't involve ownership.
The housing complexes, which are so big they have their own newspaper, were built by Metropolitan Life in the 1940s for returning World War II veterans. MetLife Inc. decided to sell them in 2005, when real estate prices were soaring.
Tenants launched their own bid to take over the 11,227 units, three out of four of which were rent-stabilized and priced far below the market rate, before MetLife announced it had closed a deal.