Feb. 6 (Bloomberg) -- The U.S. foreclosure crisis has risen to new heights.
Atlanta’s 55-story Bank of America Plaza, the tallest tower in the Southeast, is set to be sold at an open outcry auction on the steps of the Fulton County Courthouse tomorrow after landlord BentleyForbes missed mortgage payments. It bought the skyscraper in 2006 for $436 million from Bank of America Corp. and Cousins Properties Inc. in the city’s biggest property deal.
Since the property market peaked a year later, the 1.25 million-square-foot (116,000-square-meter) building has lost 54 percent of its value, Bank of America, its largest tenant, has reduced space and bond investors who helped finance the purchase are on the hook for losses, according to data compiled by Bloomberg.
“It’s a fine building, a beautiful building, and still very much a landmark,” said Kirk Diamond, senior managing director at broker Cassidy Turley, in Atlanta. “It just needs to be recapitalized and written down to a market level to be able to compete effectively.”
Atlanta’s office market is a victim of overbuilding and inflated real-estate prices fueled by issuance of commercial mortgage backed securities that peaked in the U.S. at $232 billion in 2007. While investor demand for property debt surged last month by the most since March 2010 as the economy strengthened, borrowers in cities such as Atlanta outside the prime U.S. office markets of New York, Los Angeles, Washington and Boston are struggling to refinance as about $5.8 billion of five-year office loans bundled inside CMBS matures.
“We’re hitting a tremendous amount of that debt coming due,” William Yowell, a vice chairman with CBRE Group Inc. in Atlanta, said in a telephone interview. That will cause “more distressed assets that come to market this year” and may lower the price per square foot on buildings, he said.
While lenders may face more losses, real estate investment trusts are seeking to take advantage by purchasing buildings, said Jim Sullivan, managing director of REIT research at Newport Beach, California-based Green Street Advisors.
The Bloomberg Office REIT Index gained 10.9 percent this year compared with a 8.5 percent gain in the Bloomberg REIT Index. That followed a decline of 3.9 percent last year.
‘Man In Full’
Atlanta’s boom and bust property market set the stage for Tom Wolfe’s 1998 novel ‘A Man in Full’’ that portrayed an ego- driven Southerner who builds an empire of office complexes.
It’s now squarely in the bust category with the highest rate of late payments for loans on offices bundled into bonds among the largest U.S. metropolitan areas, at 25.3 percent, according to data compiled by Bloomberg. That’s increased from 10.4 percent a year ago and is more than triple the 7 percent national rate. The rate for payments 60 days late or more was higher than Cleveland at 23.4 percent and Phoenix at 23.3 percent, the data show.
The $363 million Bank of America Plaza loan became delinquent in December after BentleyForbes stopped making payments, pushing the overall delinquency rate on CMBS debt to 9.32 percent, according to Moody’s Investors Service. The loan was partly packaged inside JPMCC 2006-LDP9, which was downgraded by Fitch Ratings in December because of expected losses.
C. Frederick Wehba II, president of Los-Angeles based real estate investor BentleyForbes, didn’t return calls. Bud Perrone, a spokesman for LNR Partners, the special servicer tasked with handling the loan, declined to comment.
Gone With the Wind
The 1,023-foot building would be the tallest in the U.S. to be foreclosed on since the financial markets froze in 2007, according to Real Capital Analytics Inc., a New York-based property research company. Boston’s John Hancock Tower, New England’s tallest skyscraper at 790 feet, was sold at auction in 2009 after its owner defaulted on debt they used to buy it three years earlier.
The Bank of America tower is a block down Peachtree Street from Atlanta’s historic Fox Theatre, where “Gone with the Wind” began showing after it premiered in 1939. Its façade is covered in granite reminiscent of red Georgia clay, topped by a lighted steel frame pyramid and a 90-foot spire that’s visible from miles away. Purple, orange and white pansies line the brick walkways leading to the entrances.
The building is situated between Atlanta’s downtown and Midtown areas. A block down Peachtree Street is Gladys Knight’s Chicken and Waffles restaurant, where the “Midnight Train” plate of fried chicken wings and a malted waffle costs $10.50, and there’s a pita restaurant and diner on the next block.
BentleyForbes bought the tower from a joint venture of Charlotte, North Carolina-based Bank of America and Cousins Properties, an Atlanta-based real estate investment trust. In 2007, a year after the sale U.S. office property transactions peaked at more than $200 billion, Real Capital data show.
The market tumbled the following year as lenders restricted borrowing and the economy fell further into recession. Wall Street banks arranged about $28 billion of commercial mortgage debt securities last year, compared with $11.5 billion in 2010, Bloomberg data show.
Investor demand for the securities has climbed this year as the U.S. jobless rate fell in January to 8.3 percent, the lowest level in three years, and Europe’s sovereign debt crisis abated.
The extra yield investors demand to hold top-ranked commercial-mortgage bonds rather than Treasuries declined 45 basis points since December to 216 basis points, or 2.16 percentage points, according to the Barclays Capital CMBS AAA Super Duper Index. That’s the narrowest spread since July after the fastest contraction last month in almost two years.
Lenders have also stepped up competition to lend to New York trophy towers with $930 million refinanced on two skyscrapers since the middle of December; Vornado Realty Trust’s Park Avenue tower and Sheldon Solow’s 9 West 57th Street, home to Chanel SA and KKR & Co.
Even with improvements, only 27 percent of loans originated in 2007 at the peak of the market that had so-called balloon maturities in January “managed to pay off,” according to Trepp LLC, a mortgage data provider. Five-year office loans are $5.8 billion of the overall $55 billion of CMBS loans maturing in 2012, Standard & Poor’s said in a December report,
Prices in cities such as Atlanta and Phoenix are well below their highs, Peter DiCorpo, president of CBRE Global Investors U.S. managed accounts group, said in a telephone interview.
Atlanta office rents are down about 10 percent to $18.27 a square foot since the first quarter of 2008 and the market has a 16.7 percent vacancy rate, according to CoStar Group Inc.’s Property and Portfolio Research. The New York area’s vacancy rate was 8.4 percent in the fourth quarter with an average rent of $36.46 a square foot.
They’re “going to struggle to get back to peak levels within the next five years,” Jeff Myers, a real estate economist at CoStar, said in a telephone interview from Boston.
The Plaza was appraised in March at $202 million, Bloomberg data show. Its biggest tenant, Bank of America, said it would reduce its space of net rentable areas to 15 percent from 30 percent and the lease rate will drop by half, Fitch said in the December report. Accounting firm Ernst & Young, which leased 196,000 square feet of space, moved in 2007 a few blocks south to the then-newly built Allen Plaza complex, according to data compiled by commercial real estate brokerage Colliers International.
An investor buying the Bank of America Plaza property will have to be patient, said Julian Diaz, chair of the real estate department at Georgia State University in Atlanta, said in a telephone interview.
“This is an opportunity for someone with staying power to get an asset they’re basically buying at the bottom,” Diaz said. “If they’ve got the staying power this is going to be a very valuable asset when the market turns back around.”
Real estate investment trusts have the capital to buy distressed properties and have been looking for deals, Green Street’s Sullivan said in a telephone interview.
“The REITs are well positioned financially and operationally to take advantage of more of these deals if they come.”
Cousins, the Atlanta-based REIT, bought Promenade Two, an Atlanta building in November that was 58 percent leased when it purchased it after its anchor tenant moved out.
The price for the 774,000 square foot building was $134.7 million, or about $174 per square foot. The replacement cost is about $315 to $320 a square foot, Larry Gellerstedt, Cousins’ chief executive officer, wrote in an e-mail.
In the early morning hours, swaths of the Bank of America Plaza’s middle and lower sections remain unlit in a testament to its declining occupancy rate.
“You look across the street and you can just see all those vacant floors,” said Lionel Alexander, 56, a bridge design engineer for the Georgia Department of Transportation, who works in an office building across the street. “It’s really sad. Hopefully they can fill it back up someday.”
--With assistance from Sarah Mulholland, David M. Levitt and Christine Harvey in New York and Ilan Kolet in Ottawa . Editors: Pierre Paulden, Rob Urban
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