Commercial Grade

by James Dunne, The Brooklyn Brain

The sales history of this commercial office building is really the epitome of what has taken place during the past few years in the commercial real estate market, and the story behind the recent transactions are filled with such irony, that I had to write about it.

Back in 2007 the Mortgage Bankers Association (MBA) decided to purchase a building under construction at 1331 L Street NW in Washington DC for $79 Million, five blocks from the capital (makes sense because their political action committee, the Mortgage Bankers Association Political Action Committee or MORPAC, could be close to Congress to lobby them on behalf of their business). Holliday Fenoglio Fowler LP, a real estate advisory firm, announced in June 2008 that it had arranged the $75 million financing for the MBA at the height of the commercial real estate market MBA took out a $75 Million mortgage on the building from PNC.

Guess what happened next? The property market crashed. The value of the MBA’s shiny new office building plunged in value. In February of 2009, at the bottom of the market, the MBA sold the building for $41.3 Million, and essentially walked away from the balance they owed.

Now it’s time for the hypocrisy - John Courson, the CEO of the trade group, when asked in a prior interview about homebuyers intentionally walking away from their mortgages, said “What about the message they will send to their family and their kids and their friends?” On top of that, giant commercial landlord Tishman Speyer is locked in a court battle with the MBA, contending the trade group still owes $1 million after breaking an earlier lease to move into its former, massively overpriced headquarters.

However, the winners of this deal are also connected to the real estate industry - the buyer was the CoStar Group Inc., the largest provider of Commercial Real Estate Data in the U.S. (we use them in my office) - as mentioned, they paid $41.3 Million. But now, the commercial property market is rebounding (in my office we’re seeing strong demand from institutional buyers for high-quality, class-A, well-leased offices). So now CoStar is reselling the property, just a year later for $101 Million to German property-fund Manager GLL Real Estate Partners, who CEO Jochen Schnier is taking advantage of low interest rate. CoStar will stay as a tenant in the building. CoStar doubles its money, and GLL gets a high-quality, long-term investment.

“If people are informed they will do the right thing. It’s when they are not informed that they become hostages to prejudice.” Charlayne Hunter-Gault

For this post, I’m going to put in a brief word about my pet project, InformedAppraiser.com.

It goes without saying that the internet has changed the way appraisers work. Virtually all of the information an appraiser could possibly need can now be obtained via online sources. This is a good thing, of course. The flip side is that the old problem of “too little information” has been replaced with a new version - “too much information”.

Several years ago, I found my Favorites list (actually, Bookmarks list, since I use Firefox) growing too big for its own good. It got to the point where I’d have to scroll through hundreds of links to find what I wanted in any particular situation. Various attempts at organizing my Bookmarks proved fruitless. I figured that I couldn’t be the only appraiser facing this annoyance, and that there had to be a better way.

To that end, I developed InformedAppraiser.com. This website is essentially a database of websites that are of interest to appraisers. You simply select the type of information or resource you need, specify the location (if relevant), and presto - you are presented with a detailed list of links to websites that should be relevant to your interests. Best of all, I designed the site so that anyone can submit additional websites to the database with relative ease, a la Wikipedia. Users can also post comments regarding any website in the database to share their thoughts and insights with fellow appraisers. To top it all off, it’s 100% free (hey, it works for Google, right?).

Until next time, happy appraising, and stay informed!

In the January 26 issue of Real Estate Weekly, Massey Knakal reported that total sales volume in 2010 was $14.5 billion “up 131% from 2009, when volume ended up at $6.3 billion.” In Eastern Consolidated’s January newsletter, they report that “the cumulative sales volume for the year ($15.8 billion) surpassed the total volume for all of 2009 ($5.9 billion) by 168%..” So, Massey Knakal reports $14.5 billion in 2010 sales and Easter Consolidated reports $15.8 billion…my question is, what accounts for the $1.3 billion difference, or nearly a 10% spread?

Both brokerages are relatively consistent in their estimates of 2009 sales volume ($6.3 billion reported by Massey Knakal versus $5.9 billion reported by Eastern Consolidated, a 7% difference), and both firms have similar estimates of sales during the peak year 2007 ($62 billion and $63 billion, respectively, a 2% difference).

With 111 Eighth selling for $1.8 billion I suppose that all it takes is one transaction to account for such a difference. Any thoughts?