Strategic Defaults

The Stuyvesant Town and Peter Cooper Village apartment complexes in New York, NY.
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The Stuyvesant Town and Peter Cooper Village apartment complexes in New York, NY.

The lead story in commercial real estate today is the dynamic duo of Tishman Speyer and BlackRock walking away from Stuyvesant Town and Peter Cooper Village in Manhattan. The two have been trying to refi $4.4 billion in debt on the 11,200-apartment property, to no avail. So now they're handing over the keys to the lenders.

The joint venture bought the property at the height of the market for $5.4 billion. Now, thanks to falling values in commercial and residential real estate, it's worth about $2 billion.

Here's the quote from the venture: "The only viable alternative to bankruptcy would be to transfer control and operation of the property, in an orderly manner, to the lenders and their representatives."

This news comes on the heels of Morgan Stanley walking away from its commercial mortgage commitments on five buildings out in San Francisco.

Apparently it's just good business.

So why is it not just good business for homeowners to walk away from their mortgages? Borrowers are looking at the same negative equity and loss on investment, simply on a smaller scale. At least that's the running argument. Somehow it's fine for commercial investors, but not for individuals? I'm not taking a side here, but I wanted to throw out some math done by my colleague Steve Liesman:

If the average home mortgage in the U.S. is about $140,000, then Tishman and buddies walked away from the equivalent of 38 thousand mortgages... that's from an investment perspective.

Some folks argue that home mortgage walkaways are destroying the housing market by pushing up the number of foreclosures, which in turn drive down the value of the homes around them. I'm sure the same argument can be made in the commercial real estate market. Massive defaults only push commercial values down further and in turn make it even harder for the next investor to get credit.

Oh, but that's just a company and a building, not a person, right?

Well, think about the other investors in that commercial property. One of the big investors in Stuyvesant Town and Peter Cooper Village is the California Public Employees Retirement System.

They, I believe, hold an awful lot of regular folks' retirements.

Actual people.

Questions? Comments?