Deflation's Iron Grip

Tishman’s $5.4 Billion Boomerang Gives Speyer Lesson (Update1)

By Oshrat Carmiel and David M. Levitt

Dec. 21 (Bloomberg) -- Rob Speyer showed little interest in his family’s real estate business until his father began talking about buying Manhattan’s Rockefeller Center.

It was 1995. Speyer, then 26, was a reporter for the New York Daily News, covering fires and events like the Puerto Rican Day Parade. His dad’s plans to purchase the art-deco complex for $1.2 billion changed everything.

“I caught the bug,” Speyer said of joining Tishman Speyer Properties LP, the firm co-founded in 1978 by his father, Jerry, and Robert Tishman. “Until that moment, I had other ideas and ambitions and it was really hearing about that transaction that flipped the switch in my head and made me say: ‘I want to learn this business.’”

Speyer, now co-chief executive officer of Tishman Speyer, is getting another lesson, one on enduring the global commercial property rout. Tishman Speyer and BlackRock Realty LP’s $5.4 billion purchase of New York’s Stuyvesant Town and Peter Cooper Village apartments is unraveling, testing the young Speyer and his father, a 30-year real estate veteran. “A default is expected” on the complex, according to Fitch Ratings, which has estimated the property’s value at $1.8 billion.

The transaction is among at least four -- including the $13.6 billion purchase of Archstone-Smith Trust with Lehman Brothers Holdings Inc. in October 2007 -- that the company made as values rose and Jerry Speyer was giving his son increasing responsibility for running the company.

Prices fall

Tishman Speyer is in talks to overhaul debt on five downtown Chicago office buildings. Partnerships including the company have been sued for foreclosure on a 56-acre California office park purchased with another parcel for $200 million. And on Dec. 18, Standard & Poor’s withdrew its credit rating on a group of Washington-area properties with debt payments that Tishman and its partners have been trying to restructure.

The Speyers are being hurt in part by U.S. commercial real estate prices that have fallen 43 percent since late 2007. The fallout represents the biggest challenge for Rob Speyer since he became co-CEO with his father in June 2008, said Lawrence Longua, director of the REIT Center at New York University’s Schack Institute of Real Estate.

“It’s going to be a long time before he can overcome this,” Longua said. “This has really been quite damaging.”

Big Buyers

The Speyers said that Rob has led the sale of more than $12 billion in real estate at the top of the market and that the company has achieved average annual returns of 20 percent for investors since the company was founded.

Since 2001, Tishman Speyer has been the biggest U.S. commercial real estate buyer after Blackstone Group LP, according to the New York research firm Real Capital Analytics. Rob Speyer is part of a multigenerational group of New Yorkers whose families made fortunes in real estate, including the Milsteins, Zeckendorfs and LeFraks. Jerry Speyer was named the world’s No. 1 developer in a 1998 New York Times article that referred to him as the anti-Donald Trump.

Rob Speyer runs a company that has managed, owned or developed more than $54 billion in assets on four continents, including 116 million square feet of space and 92,000 residential units, according to its Web site. Its current portfolio is worth $33.5 billion, including distressed assets written down to zero, company spokesman Steven Rubenstein said in an e-mail.

Holdings include the MetLife Building in New York, the Civic Opera Building in Chicago, the Paris Bourse in France and properties in Germany.

Speyer’s first job in the business was in management and leasing at Tishman Speyer. He worked on revamping Rockefeller Center, the 6.2 million-square-foot complex built by John D. Rockefeller Jr. in the 1930s as a show of faith in America during the Great Depression.

In Chicago, the company is trying to restructure debt on office properties it bought in 2007 for $1.72 billion. The Federal Reserve Bank of New York oversees $1.4 billion of loans made by Bear Stearns Cos.

In New York, the company is facing default on Stuyvesant Town and Peter Cooper Village, Manhattan’s biggest apartment complex. The property is a World War II-era, 80-acre development housing about 25,000 people. The $3 billion in debt used to buy it was bundled with other commercial mortgages and sold as bonds.

When Tishman Speyer and BlackRock Realty bought the 11,200- unit property in 2006, they planned to raise rents, evict illegal occupants and upgrade the complex with amenities including a gym, concierge service and new gardens.

Those plans were challenged by a recession, slackening demand for rentals and a legal victory for tenants who claimed some rent increases were illegal. Average rents for a two- bedroom Manhattan apartment fell 16 percent after peaking in May 2007 at $3,907, according to Gary Malin, president of property broker Citi-Habitats Inc.

Tishman Speyer has ceased signing new leases at the complex, Bud Perrone, a company spokesman, said. It reached a temporary agreement with tenants this month that will reduce some rents starting in January.

Investors including the Florida State Board of Administration, the California Public Employees’ Retirement System and the Church of England put money into the Stuyvesant Town deal. U.S. government-owned mortgage finance companies Fannie Mae and Freddie Mac own the biggest portion of the debt.

Pension Fund Returns

Florida anticipated a return of almost 14 percent on its investment, according to the memo. Calpers, the California state pension fund, projected a 13.5 percent rate of return on its $500 million investment, according to a document provided by agency spokesman Clark McKinley.

Stuyvesant Town may hurt Tishman Speyer’s efforts to raise money in the future, said Longua, of New York University.

“They’re going to have a lot of ‘I’m sorrys’ to deal with,” he said.

It’s only when the subject of the firm’s reputation is raised that Jerry Speyer speaks.

“Even in this really dreadful period that we’ve been through, we sold this incredible amount of real estate thanks to Rob’s foresight,” he said.
They include the sale of the New York Times Building in 2007 to Africa Israel Investments Ltd. for $525 million. Tishman Speyer bought it three years earlier for $175 million. The company also sold 666 Fifth Ave. to Kushner Cos. for $1.8 billion in 2007. It was the highest price ever paid for a single U.S. building at the time.


Young Rob Speyer of Tishman Speyer is learning a hard lesson courtesy of Mr. Market and the bungling Federal Reserve. When deflation appears, it means prices go down not up!

Stuyvesant Town purchase has lost 66% of its value since Speyer bought it a few years ago. With defaults pending on other properties, it appears that this real estate investor will soon be underwater along with many other Commercial Real Estate property holders.
Bankers and pension funds beware, the next shoe in the financial crisis will soon drop. You will not be able to ignore the write downs on your balance sheets forever, even with the suspension of mark to market accounting!
Oh, and if you guessed that the primary tenant at 666 Fifth Avenue is Citigroup, you're right!
One has to wonder is there is some sort of message for us here with what was once the largest bank by market value, that has massive CRE holdings, about to slide down deflation's slippery slope. Something dark seems afoot.

As Deflation's Iron Grip takes hold, we anticipate seeing a stronger dollar (temporarily), lower crude prices, slightly lower gold & silver prices, and a stock market downturn once the "growth" that is forecast evaporates.